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EUROPEAN

COMMISSION

Brussels, 20.9.2013 SWD(2013) 346 final

Volume 2/4

COMMISSIO� STAFF WORKI�G DOCUME�T

Member States Competitiveness Performance and Implementation of EU Industrial

Policy

Country chapter: Belgium

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4 Country chapters


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4.1. Belgium

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Labour productivity per hour worked (EU-27=100; 2012)

Labour productivity per person employed (EU-27=100; 2012)

Labour productivity per person employed in manufacturing (1000 PPS; 2012)

% of employees in manufacturing with high educational attainment (2012)

Tertiary graduates in mathematics, science and technologyper 1000 of population aged 20-29 (2011)

R&D performed by businesses (% of GDP; 2011)

Energy intensity in industry and the energy sector(kg oil eq. / euro GVA; reference year 2005; 2011)

CO2 intensity in industry and the energy sector(kg CO2 / euro GVA; reference year 2005; 2011)

Environmental protection expenditure in Europe(euro per capita and % of GDP; 2011)

Share of high-tech exports in total exports (2012)

Exports of environmental goods as % of all exports of goods (2012)

Time required to start a business (days; 2011/12)

Business environment score (1= best 0 = worst; 2011/12)

Enterprise survival rate after two years (2010)

Business churn (enterprise entries and exits as % of existing stock; 2010)

Share of high-growth enterprises as % of all enterprises (2010)

Electricity prices for medium size enterprises excluding VAT(euro per kWh; 2nd semester 2012)

Infrastructure expenditures (euro per inhabitant; 2011)

Satisfaction with quality of infrastructure (rail, road, port and airport)(1=underdeveloped / 7=extensive and efficicient by int'l standards; 2012-13)

% of broadband lines with speed above 10 MBps (2013)

Legal and regulatory framework (0= neg. / 10=pos.; 2013)

Burden of government regulation(1 = burdensome 7 = not burdensome; 2012-13)

E-government usage by enterprises (%; 2012)

Early stage financing (% of GDP; 2012)

Access to bank lending for SMEs (1 = best 0 = worst; 2011)

Time taken for payments by public authorities (days; 2013)

The gap between the EU average and the country value

(measured in standard deviations)* For full explanation, see the methodological annex

Belgium

2007

latest available

�ote: In the graph, data are presented in such a way that data bars pointing to the right (left) always indicate performance which is better (weaker) than the EU average.

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�ote: In the graph, data are presented in such a way that data bars pointing to the right (left) always indicate performance which is better (weaker) than the EU average. * Access to bank lending for SMEs 2009 (instead of 2007); % of broadband lines with speed above 10 MBps 2008 (instead of 2007).

Export

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N.A.; N.A. (2007)

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N.A.; N.A. (2007)

Figure 4.1: Manufacturing sectors – Belgium (2010)


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�ote: No data available for sectors C12 (tobacco products), C15 (leather and related products), C21 (manufacture of basic pharmaceutical

products and pharmaceutical preparations)

Source: Eurostat

4.1.1 Introduction

In relation to manufacturing industry by individual

sector, Belgium is specialised in capital-intensive

industries, such as fabricated and base metals,

chemicals, food and electronic equipment. At the

more aggregated sector level, it is specialised in

sectors featuring medium-high educational and

innovation intensity, such as chemicals, petroleum

industries, and textiles. Overall, in 2012,

manufacturing produced 13.3 % of total value

added, as compared with the EU average of 15.3 %.

Belgium is more service-oriented than the average

EU economy, as services represent over 77 % of

value added (EU average: 73 %) and contribute

over 75 % of employment (EU average: 69.1 %).

While, in absolute terms, Belgium still has among

the highest productivity levels in the EU,

productivity growth has been weak in recent years.

In 2011, for instance, labour productivity declined

by 1.3 %, while the euro area as a whole increased

productivity by 1.2 %. However, the average

number of hours worked per person in Belgium was

higher than the EU average.

Given Belgium’s low productivity growth,

emphasis should be placed on factors promoting

non-cost competitiveness such as infrastructure,

innovation and human capital.1 In terms of

infrastructure, Belgium would benefit greatly from

effective measures to reduce road congestion which

is a considerable burden on the Belgian economy.

With regard to innovation, the key challenge for

Belgium is to broaden its innovation base and to

strive for a broader distribution of business R&D

expenditure across a wider range of sectors.

Belgium has already a relatively qualified

workforce and its 2020 target for people aged 30-34

completing higher education is 47 %, which would

be a 3.1 percentage point increase compared to

2012. Nevertheless, the number of graduates in

science, mathematics, engineering and technology

is lower than the EU average and labour market

mismatch hampers growth. Measures have been

taken at federal, regional and community levels to

support professional training and increase linkages

between the education system and the business

sector.

1 SWD (2013) 351.


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4.1.2 Innovation, skills and sustainability

Innovation

According to the Innovation Union Scoreboard

2013, Belgium is an ‘innovation follower’ with a

performance above the EU average. Its relative

strengths are in the indicator categories ‘open,

excellent and attractive research systems’, ‘linkages

and entrepreneurship’ and ‘innovators’. Relative

weaknesses are in ‘finance and support’ and

‘intellectual assets’.

The business enterprise sector, the main contributor

to R&D, reduced its investment from 1.51 % of

GDP in 2001 to 1.37 % in 2011, although this is still

above the EU average. This decrease was mainly

due to three factors: the economy becoming more

service-oriented;2 a reduction in R&D activities in

the telecommunications and chemicals (excluding

pharmaceuticals) sectors; and the shift of R&D

activities to other countries. Services are dominant

and are growing at a faster rate than manufacturing,

which would justify specific measures to improve

the knowledge intensity of the service sector.3

Despite a slightly positive trend since 2005,4

Belgium is unlikely to reach its 2020 R&D

expenditure target of 3 % of GDP. Business R&D is

highly concentrated in only a few sectors, and in a

small number of large companies and

multinationals.

A challenge for Belgium is how to speed up the

transition towards a more knowledge-intensive and

innovation-based economy by fully exploiting the

strengths of its research and innovation systems,

including by translating R&D results into

innovative products and services. This requires

further improving the support to clusters, and better

conditions for the growth of innovative firms.

Moreover, despite the availability of highly-

qualified human capital, there appears to be a

mismatch between labour demand and supply in

some sectors. Shortages of skilled professionals,

particularly in sciences and engineering, could

2 From 2000 to 2009, the services share under business

expenditure increased from 26 % to 33 %. 3 For details see “Research and Innovation performance in

EU Member States and Associated Countries, Innovation Union progress at country level, 2013”.

4 In the period 2005 to 2012, private expenditure on research and development (R&D) increased from 1.24 % to 1.37 % of GDP. In the same period, public R&D expenditure increased from 0.56 % to 0.65 % of GDP.

become a major barrier to improving the innovation

performance of the Belgian economy.

The authorities have acknowledged that innovation

is essential for productivity growth and for

improving the competitiveness of the economy.

This is reflected in budgetary decisions taken by all

political entities in recent years.5 Federal level

measures include a payroll tax incentive to decrease

R&D personnel costs and a tax credit to decrease

the costs of R&D investment, and more flexible

conditions for tax exemptions on royalty income

from patents.6

The Belgian regions have developed strategic

innovation approaches covering all major aspects of

a comprehensive innovation strategy. In the

Walloon region, the focus has been on supporting a

limited number of competitiveness poles (a cluster

approach); in 2012, EUR 40 million was allocated

to R&D projects on competitiveness clusters under

the ‘Plan Marshall 2.Vert’.7 New approaches have

been developed under the ‘Creative Wallonia’

programme to support market take-up of new

products and services (whether technology-based or

not), and the promotion of cultural and creative

industries. In the Flemish Region, a main driver of

research and innovation policy is to address major

economic and societal challenges through

innovation. For instance, five living-labs platforms

were set up to facilitate innovation in the area of

electric vehicles. In the Brussels Capital region, an

updated innovation strategy, including a ‘smart

specialisation’ approach, was launched in 2012.

The region is intending in 2013 to implement

innovation vouchers to support financing for

innovation. The communities and the regions

continue to support excellence in science and they

have increased participation in EU cooperation

initiatives such as joint programming or the

European Strategy Forum on Research

Infrastructures. Initiatives are developed to foster

better coordination of the efforts made by the

communities, regions and federal government on

R&D, and technological innovation.

5 Public R&D budgets increased from EUR 2.29 billion in

2009 to EUR 2.47 billion in 2012. 6 The existence of a research centre constituting a separate

activity branch is no longer a condition to exempt 80 % of royalty income from patents.

7 Plan Marshall 2.Vert is an action plan to take up the economic, social and environmental challenges facing Wallonia, with a budget of EUR 2.75 billion for the period 2009-14.


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Skills

Although participation in higher education is high,

and while Belgium pursues ambitious targets in this

field, there are skills mismatches in terms of levels

and relevance to labour needs, which makes it more

difficult to tackle unemployment and support

growth. There are skills shortages for technical and

future-oriented occupations at all levels of

education. The number of graduates in science,

mathematics, engineering and technology is lower

than the EU average, as in 2010, there were 12.2

graduates per 1 000 in the age group 20-29

compared to 15.2 in the EU.

There are concerns on the level of entrepreneurship.

According to the latest Eurobarometer8 survey, the

proportion of people who would like to be self-

employed is lower than the EU average.9

Entrepreneurship readiness has been an issue for

some time, and policies will have to be maintained

to achieve a shift in attitudes, especially among

young potential entrepreneurs. Although there is a

need to increase occupational and interregional

mobility, adult participation in lifelong learning is

below the EU average (6.6 % vs. 9 % in 2012),

notably for older and low-skilled10 workers, and has

declined recently.

In Flanders, a project to reform secondary

education and vocational training was initiated in

2010. An agreement on an orientation note aiming

at a profound reform of secondary education was

reached in 2013 with the final decision to be taken

by 2016. The francophone community has also

taken measures to reform its vocational education,

with a draft decree on higher education

modernisation currently under debate.

Sustainability

The high energy use of industry and the low energy

efficiency performance of households make the

economy highly energy-intensive, although some

progress is being made in reaching the 2020 targets.

The target of increasing the share of renewable

8 Flash Eurobarometer 354, 2012

http://ec.europa.eu/public_opinion/flash/fl_354_en.pdf. 9 At 30.4 % this figure is much lower thatn the EU average

of 45 %. 10 Learning participation rate of adults is 7.1 %, older

workers 3.9 %, and low-skilled 3.1 % - Eurostat 2011.

energy in energy consumption is likely to be met

but probably not for greenhouse gas emissions in

sectors like buildings, transport and farming. Road

transport and energy are the largest sources of

greenhouse gases.

The high energy use of industry is explained by the

importance of energy-intensive metals and

chemicals production. These two activities

represent one-fifth of all industrial value added11

and consume almost two-thirds of all final energy

used in industry.

There is a series of measures on energy efficiency

that cover most sectors, with a particular focus on

the refurbishment of existing buildings. The

economy’s emissions intensity is high in some

significant sectors (such as heavy industry or

residential heating), but this is mitigated overall by

the importance of nuclear energy production. In

particular, emissions from road transport have

increased over the past two decades, whereas most

other sectors have cut emissions. In 2010, road

transport produced 17.7 % of all greenhouse gas

emissions, indicating that it should be a central part

of future emission reduction policies.

4.1.3 Export performance

Exports of goods and services have been growing at

a lower rate than exports from the euro area (23.9 %

from 2006 to 2012 compared with 28.02 % for the

euro area).12 Exports consist mainly of intermediate

goods to the euro area, in particular neighbouring

countries. Export specialisation is in low and

medium-technology goods, for which price

competition is higher and which are easier for other

countries to copy or replace. Over the past decade,

there has been increasing specialisation in

intermediate goods. It should be noted that although

the proportion of high-tech exports has increased

since 2000, it is still relatively small.

The range of destinations of exports has become

more diverse. In 2012, 69 %13 of exports of goods

and services were directed to other EU member

States (notably Germany, France and the

Netherlands) but the share of exports going to the 11 ‘Greenhouse Gas Emissions and Price Elasticities of

Transport Fuel Demand in Belgium’, OECD Economics Department Working Paper No 955 p.9.

12 L’Institut des Comptes Nationaux (ICN). 13 L’Institut des Comptes Nationaux (ICN).

http://ec.europa.eu/public_opinion/flash/fl_354_en.pdf


104

largest emerging markets (China, Brazil, Russia,

India, Mexico, Indonesia and Turkey) has increased

from 4.7 % in 2000 to 8.4 % in 2011. Exports

outside the EU accounted for 28.8 % of the total in

2011 and 30.6 % in 2012.14 It is worth noting that

Belgian exporters have benefited indirectly from

new markets through exports to Germany.

Belgium appears to be losing some share of goods

exports — partly as a result of delocalisation of the

production of certain goods — but it is performing

better in services. The share of goods exports as a

proportion of total EU exports has decreased

slightly in the past six years.15 However, the share

of services as a proportion of total EU service

exports has increased from 4.5 % in 2006 to 5.1 %

in 2011. Services may be partially replacing goods

in international trade, but their contribution remains

small. Hence, increasing the competitiveness of

Belgian goods exports remains a challenge.

4.1.4 Business environment and public administration

Business environment

In general, the business environment is considered

to be good. The World Bank ranks the country 33rd

out of 185 for doing business. The World Economic

Forum views Belgium as one of the 20 most

competitive economies in the world. It was also

ranked 13th by Bloomberg’s Best Countries for

Business in 2013.

Strengths of the business environment include the

short time it takes to start a business, the ease of

enforcing contracts and resolving insolvency,

although the ease of obtaining business licences

differs between regions.16 However, the picture

concerning competition is mixed, as there continue

to be operational constraints in the retail sector.

Competition could be improved by easing

procedures for obtaining authorisations for

commercial premises. In general, though, business

14 l’Institut des Comptes Nationaux (ICN). 15 From 5.6 % of total EU exports to 5.5 %. 16 Brussels Capital Region and Wallonia have one-stop-

shops while Flanders is lagging behind. Sources: Commission assessment on Belgium’s National Reform Programme, SWD(2013) 351; and World Bank — Doing

Business. Note that information on the time needed to resolve litigious civil and commercial cases for Belgium has not been made available for the EU Justice Scoreboard 2013.

operations are characterised by high levels of

professional management and sophistication.17

Infrastructure is well-developed and the country is

ranked 21st in the world by the World Economic

Forum. The penetration rate of fixed broadband in

January 2012 was 32.4 % of the population (EU

average 27.7 %). However, mobile broadband

penetration is still among the lowest in the EU, and

the rollout of mobile networks is slow, hampered

by administrative obstacles.18

Some indicators, such as the procedures for

property registration in Belgium, signal that there

are further weaknesses.19 Belgium has fallen two

places in the Global Competitiveness Report and is

now ranked 17th. There are some concerns

regarding government inefficiency and the tax

system; the country would benefit from shifting

taxes away from labour to less growth-distortive

areas such as environmental taxes.20 The

macroeconomic environment also suffers from

persistent deficit spending and high public debt.

Public administration

According to the World Bank’s government

effectiveness indicator, Belgium continues to do

better than the EU average for overall public

administration performance. The perceived quality

of public services is considered to be good, and the

rule of law prevalent.21 There has been some

reduction in the administrative burden in the last

decade but inefficient government is still listed as

one of the three major problems for doing business,

and other countries have improved more. The use

of tools such as ICT solutions to improve public

17 Commission assessment on Belgium’s National Reform

Programme, SWD(2013) 351; and World Economic Forum, The Global Competitiveness Report 2012-13.

18 Commission assessment on Belgium’s National Reform Programme, SWD(2013) 351.

19 The World Bank’s Doing Business report ranks Belgium 176th out of 185 for registering property.

20 This was captured by the 2013 country-specific recommendation no 5: “Establish concrete and time-specific proposals for shifting taxes from labour to less growth-distortive tax bases, notably by exploring the potential of environmental taxes, for example on diesel, heating fuels and the taxation of the private use of company cars. Simplify the tax system by reducing tax expenditures in income taxation, increasing VAT efficiency and improving tax compliance by closing existing loopholes.” http://register.consilium.europa.eu/pdf/en/13/st10/st10623-re01.en13.pdf.

21 Government Efficiency Index, World Bank.

http://register.consilium.europa.eu/pdf/en/13/st10/st10623-re01.en13.pdf

http://register.consilium.europa.eu/pdf/en/13/st10/st10623-re01.en13.pdf


105

administration could be more widespread. Belgium

is, however, one of the forerunners in the recent

European ‘e-government benchmark’, in particular

in back-office automation.

A package has been introduced to modernise public

procurement legislation and initiatives have been

taken at federal level to simplify investment

procedures. Examples include the introduction by

the Flemish government of a single permit

integrating environmental and urban planning

licences, and the implementation of the

administrative simplification plan by Wallonia and

the French community. Further measures have also

been taken to extend the confidence principle — i.e.

streamlining administrative procedures by replacing

documents with a declaration of honour and the use

of internal sources to locate data.

4.1.5 Finance and investment

Small and medium-sized enterprises (SMEs) rely

mostly on bank loans for accessing external sources

of finance. According to the European

Commission’s 2012 Small Business Act (SBA) fact

sheet, access to finance is on average better than in

the EU. According to the survey, SMEs continue to

have greater access to public financial support

(including guarantees) than similar firms in other

EU countries. Also, the share of loans to SMEs is

higher than the EU average. On venture capital,

there continues to be strong flow to early-stage

investments, running at the level of almost three

times the EU average.

The World Bank ranks Belgium 70th of 185 for

obtaining credits. In particular, the strength of

investors’ legal rights is slightly below the EU

average, as is the availability of credit information.

The federal level and the regions have taken

measures to stimulate access to finance for SMEs.

Examples of measures taken by the federal

government include the Initio scheme providing

loans to small enterprises and aiming to finance the

launch of companies. The Brussels Capital region

has developed the Brussels Regional Investment

Company to offer financial support for firms to

start, reorganise or expand in the region. Flanders

has provided guarantees through the Gigarant

programme totalling EUR 203.9 million. The

Flemish government has approved a banking sector

plan that proposes a number of ideas to bolster the

economy and channel funding to the real economy.

In 2011, Flanders introduced a consultancy service

that gives entrepreneurs the opportunity to present

their projects to a panel of financial experts who

will advise them on the optimal financing mix for

their specific situation. Wallonia offers a variety of

financing schemes through its specialised SME

financing institutions, including micro-credits.

Furthermore, the Walloon government, in

partnership with the banking sector, has set up an

automatic guarantee scheme (up to 75 % of a loan)

to a limit of EUR 25 000, with the possibility of

additional funding (up to 50 %). The measure

targets micro-enterprises, the self-employed,

artisans and freelance workers.

4.1.6 Conclusions

In many ways, the competitiveness profile of

Belgium reflects the average of the northern EU

Member States. The good competitive position has

been deteriorating in recent years, in particular

because exports are mainly composed of low and

medium-tech goods, facing international

competition from lower-cost countries. The exports

are mainly oriented towards the EU market.

The key challenge ahead, therefore, is to regain

both cost and non-cost competitiveness, and to

speed up the transition towards a more knowledge-

intensive economy by increasing and improving the

use of innovation, and addressing the skills

mismatch. The implementation of burden-reduction

initiatives at the federal and regional levels is

important to accelerate the simplification and

streamlining of procedures.

Country chapter: Bulgaria

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4.2. Bulgaria

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Bulgaria

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Figure 4.2: Manufacturing sectors – Bulgaria (2010)

�ote: No data available for sectors C19 (coke and refined petroleum products) and C21 (manufacture of basic pharmaceutical products and

pharmaceutical preparations)

Source: Eurostat

4.2.1 Introduction

Despite relative progress between 2007-11 Bulgaria is still characterised by low productivity and dominance of low-tech and medium-low-tech industries, with food, beverages and tobacco as the biggest sector. The transition from a resource-based to an innovation-based economy is a challenge. However, high- and medium-high-technology firms produce 29 % of the total value added and employ 21 % of the labour force in manufacturing.


Innovation

The Innovation Union Scoreboard 201322 ranks Bulgaria in the ‘modest innovators’ group. Weaknesses exist in particular in open, excellent and attractive research systems; finance and support; firm investments; and linkages and entrepreneurship. Only 17 % of SMEs have introduced marketing or organisational innovation (EU average 39 %), and only 21 % have introduced a new product or a new process (EU average 34 %).23

Under the Europe 2020 strategy, Bulgaria aims to invest 1.5 % of GDP in R&D by 2020, which is an 22 Innovation Union Scoreboard (Apr 2013). 23 Eurostat (Community Innovation Survey) (2008).

ambitious target as current R&D intensity is slightly above 0.5 %. While R&D investment by business has increased slightly to 0.3 % of GDP, some of this is due to a change in accounting practices.

The World Economic Forum ranks Bulgaria 97th out of 144 countries in innovation and sophistication; although in efficiency enhancers it is 59th out of 144 countries.24 Relative strengths in the completion of tertiary education and upper secondary education lay the basis for improvement. Recent policy initiatives include measures to improve competitiveness in science; identifying and promoting projects that would be suitable for commercialisation; and supporting private sector capacity for research and innovation. Further initiatives have been taken to improve the linkages between academia and businesses, but the legislation was delayed by the government’s resignation in February 2013 and the subsequent general elections.

A National Innovation Fund was set up in October 2012, and should be up and running by the end of 2013, with the overall objective of promoting research and carrying out feasibility studies on new or significantly improved products or processes.

24 Efficiency enhancers comprise higher education and

training, the efficiency of goods and labour markets, the status of financial market development, technological readiness and market size.


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Two grant schemes to support research and innovation activities by SMEs either in-house or in partnership with R&D organisations were set up in 2011. Seventy-seven grant agreements were signed for research, and 110 start-ups received innovation support in 2012.

Skills

Labour productivity in Bulgaria is low, and the percentage of employees in manufacturing who have completed higher education is below the EU average. To increase competitiveness by enabling specialisation in higher value added sectors, Bulgaria needs to improve the education system and introduce basic business training.

Unemployment varies across the regions, with the national unemployment rate at 12.3 %. Youth unemployment has been increasing constantly since 2010, and in the fourth quarter of 2012 reached 28.4 %.25 This has to be seen in the context of a structural labour market mismatch: the annual demand for graduates with engineering and technical skills has been estimated at 64 000, against 23 000 available graduates with those skills. At the same time, there are 46 000 graduates in business and economy against a demand of 23 000, and 24 000 humanities graduates with an estimated need of 2000. Investment in education is below EU average at 3 % of GDP against 5.6 % for the EU. The gap between the supply of graduates and labour market demand worsens structural unemployment and hampers the development of high-value, innovative sectors. Implementation of the reform of higher education, effective governance and sufficient investment would help to promote growth and competitiveness.

Sustainability

The Eco-Innovation Observatory ranks Bulgaria seventeenth in the EU on its eco-innovation scoreboard,26 although only a quarter of SMEs have introduced environmentally friendly innovations or received public support for their resource efficiency measures. A grant scheme is in place to help SMEs to improve the efficiency and productivity of environmentally friendly technologies.

Bulgaria is heavily dependent on a single source of energy and energy system liberalisation and modernisation has not been completed. Energy prices have remained regulated as they are seen to have an impact on economic and political stability. Although a large majority of SMEs have taken resource-efficiency measures, there is room for 25 Eurostat, Unemployment Statics, April 2013. 26 Eco-innovation in Bulgaria, EIO Country Profile 2012.

improvement, especially in the energy front. Benefiting from very low electricity prices, industry is Bulgaria is the most energy intensive in the EU;27 and the CO2 intensity is also the highest. Reducing energy intensity should also increase energy independence.

Bulgaria is committed to reaching its goal of renewable energy sources representing 16 % of its final energy consumption, and 10 % in transport, by 2020. In 2010, the renewables accounted for 13.8 %, which exceeded the first interim target of 10.7 % set for 2011.28 In the transport sector, renewables accounted for 0.4 % in 2011. The law on renewable energy sources was amended in February 2013 to introduce a mandatory share of bio-fuels in the fuel mix used for transport.29

The political developments in January and February 2013, with the resignation of the government and the general elections, were partly prompted by flawed energy sector liberalisation and a resulting rise in the price of electricity. Energy-sector reform and strategic targeting of energy and resource efficiency, along with improvements in household energy intensity, are essential to economic development, and will have beneficial effects on both competitiveness and political stability.

The energy efficiency law requires certificates for all buildings, industrial, public or private. An amendment reduced the minimum size from 1000 square metres to 500 square metres as from March 2013.30


In 2012, total exports of goods and services increased to 68.8 % of GDP from 47.5 % in 2009, and were 163 % of the 2006 level, indicating a recovery after a fall of over 20 % between 2008 and 2009. Extra-EU exports rose by 40 % between 2010 and 2012 while intra-EU exports rose by 28 %, but the EU is still the destination for 63.4 % of total exports.

Exports of non-financial knowledge-intensive services and high-tech manufacturing rose by

27 Eurostat and EAA data figures indicate that industry in

Bulgaria is the most energy intensive in the EU, at 0 618 kg oil eq./EUR GVA against 0 184 for the EU-27. CO2 intensity is also the highest at 5 998 kg CO2 eq./EUR GVA against 0 919 for the EU-27.

28 Renewable energy progress report (COM/2013/0175 final).

29 Law on energy from renewable sources, published in the Official Journal, No 35, 03.05.2011, as amended on 15 February 2013.

30 Law on energy efficiency, published in the Official Journal, No 24, 12.03.2013.


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almost 156 % between 2007 and 2012. Exports in these two categories represent only 3.8 % of the total value of exports, which rose by 144 %. In 2013, the time required for imports was 17 days, and for exports 21 days, against an EU average of 11.

Support for SME access to international markets is provided by the agency for the promotion of SMEs. Available schemes include participation in international professional fairs and trade missions. A national export portal has been part-funded by the ERDF and provides export strategies for 18 sectors.31 The Bulgarian Development Bank provides loans of between EUR 250 000 and EUR 3 000 000, and loan guarantees, for export-oriented companies.32

4.2.4 Business environment and public

administration


Bulgaria’s ranking in the World Bank’s Doing Business report fell in 2013 to 66th out of 185 countries, largely due to the stagnation in institutional modernisation.33 The World Economic Forum’s 2012 Global Competitiveness Report indicated an improvement in its global competitiveness index, at 62nd out of 144 countries in 2012-13 (as compared to 74 out of 142 in 2011-12). The country is characterised as efficiency-driven, and its performance as better than many other countries in this group, except for the ‘institutions’ ranking of 108th out of 144.34

Recent measures to improve the business environment include lowering the starting capital requirement; introducing e-government services to facilitate tax compliance; enabling tax payments using a single account and internet banking; and lowering bank charges.35 Tax compliance remains burdensome, although the average total compliance time fell from 500 hours in 2010 to 454 in 2011.36

31 See export.government.bg. 32 See http://www.bbr.bg/bg/кредити-по-програма-

партньори.html 33 Doing Business 2013; Bulgaria ranked 57th in 2010 and

59th in 2011. 34 The ‘institutions’ indicator measures bureaucracy and red

tape, overregulation, corruption, dishonesty in dealing with public contracts, lack of transparency and trustworthiness, inability to provide appropriate services for the business sector, and political dependence of the judicial system.

35 National reform programme 2013. 36 PWC Paying Taxes 2013: The Global Picture.

A package of 24 measures was adopted in August 2013 aiming at reducing time, cost and number of documents to be provided. These concern for instance administrative services provided by local authorities, and by the food safety and maritime agencies. Further 70 measures are announced for adoption in autumn 2013.

Corporate income tax is charged at a flat rate of 10 %, and there is the possibility to take advantage of a shorter period for VAT refunds and apply self-billing for VAT on imports of equipment for investment projects worth over EUR 5 million with maximum duration of two-years that create at least 50 jobs. This is designed to attract foreign direct investment. An automotive cluster37 was set up in July 2012 with more than 20 multinational and local businesses, complementing the existing Electromobil industrial cluster.38 A national action plan for sustainable automotive transport, including electronic vehicles, has also been adopted.39

The licensing complexity index, measuring the economic impact of legal and administrative procedures for post-registration licensing, is 25 % higher in Bulgaria than elsewhere in the EU.40 It is easier to start a business than last year, as both the time needed, and the cost have fallen.

Investment in infrastructure could unlock wider growth and investment, particularly in railways and ports, but also in multimodal hubs, as these would allow Bulgaria to exploit its geographical location at the crossroads of EU, the Balkans and Turkey.

A national programme ‘Digital Bulgaria 2015’ was adopted in 2012.41 Although fixed broadband covers about 90 % of homes, the take-up is 51 %, which is below the European average of 73% of homes. Broadband infrastructure is still lacking, in particular in rural areas.42 Equipment providers and infrastructure operators have suffered delays in payment by the public authorities, although the late payments directive should change this.

Overall, businesses would benefit from more transparent and simpler regulations and procedures. The results of the action plan to reduce the administrative burden (2012-14) that was adopted in June 2012 remain to be seen.

37 http://www.automotive.bg/?go=news 38 http://www.emic-bg.org/content/item/1 39 http://www.emic-bg.org/files/files/SAP-NPD_EV_2012-

2014-final.pdf 40 SBA (Small Business Act) Fact Sheets 2013. 41 Decision of Council of Ministers No 953, 16.11.2012. 42 Digital Agenda for Europe Scoreboard, 2013.


110


Government effectiveness is below the EU average43 and deficiencies in administrative capacity limit the absorption of EU funds. However, improvements have started to be made. The recent incorporation of management of the competitiveness Operating Programme in the Ministry of Economy and Energy is aimed at reducing the administrative burden on beneficiaries and could simplify reporting obligations. Legislative improvements to public procurement have been introduced, but require sound implementation, including broader ex-ante control of procedures. Further amendments were proposed by the Government in summer 2013, with the stated objective of improving transparency and access to public procurement markets, including by SMEs.

Transparency International’s 2012 corruption perceptions index44 ranks Bulgaria 75th. To improve the stability and competitiveness of the business environment, the government has made tackling corruption a major objective.

The EU Justice Scoreboard45 shows that the judicial system has improved, as the disposition time of civil cases has shortened to 67 days in 2010 from 148 days in 2008. The clearance rate is 99 %, with a slight increase in pending cases.

An integrated strategy for the prevention of corruption and organised crime has been drafted. Further action on the independence of the judicial system and on the efficiency of the legal framework in settling disputes would be warranted, however. Strengthening customs performance would also help to protect national and EU financial interests.


The financial system is stable but the operating environment is challenging, with low growth and decreasing asset quality. Innovative start-ups and SMEs have problems in accessing finance, in particular bank loans, because banks’ balance sheets adjustments and the upward trend in non-performing loans (rising from 6.4 % in December 2009 to 16.9 % in June 2012).

43 Excellence in Public Administration for Competitiveness

in EU Member States, 2013. 44 Transparency International Corruption Perceptions Index

2012. 45 EU Justice Scoreboard 2013.

A new funding scheme was adopted in 2012 to support start-ups,46 and Structural Funds are being used for SME finance under the Jeremie scheme. Further, a new initiative has been announced this year to support SMEs in rural areas with investment in areas such as technology. However, there are some doubts about the effectiveness of the government schemes.47 The World Bank is providing technical assistance to help to absorb the Structural Funds.

More progress has to be made in improving the insolvency procedure and to fight the upward trend in non-performing loans. The time needed to wind up a business has remained constant at 3.3 years.48

4.2.6 Conclusions

Bulgaria faces considerable challenges in improving its competitiveness. In the short term, industry needs to move towards products and services with higher added value, and labour productivity needs to be improved. Higher productivity should also be pursued in service sectors, including tourism.

A national strategy for SMEs 2014-20 is being prepared. It indicates that Bulgarian authorities are grasping the problem, as the draft aims to improve Bulgarian competitiveness by covering issues concerning both SMEs and industrial sectors .

These require a favourable operating environment for businesses, particularly with regard to the administrative burden on businesses; improved energy and resource efficiency; and access to finance. In the medium term, the move towards a more knowledge-oriented economy requires improvements in the quality of infrastructure, in education, and in research and innovation.

46 The Entrepreneurship Acceleration and Seed Financing

Instrument, worth € 21 million, is currently operating with investment in innovative projects, mostly in ICT.

47 Economist Intelligence Unit (2013): ‘Country report: Bulgaria’, World Bank (2013), AECM (2013).

48 World Bank (2013): ‘Doing Business: Bulgaria’, European Commission (2012): ‘SBA Fact Sheet: Bulgaria’, Minutes of the meeting between the European Commission Secretariat-General and the Bulgarian Ministry of Finance (February 2013).

Country chapter: Czech Republic

111

4.3. Czech Republic

-3 -2 -1 0 1 2 3





























Czech Republic

2007

latest available


Innovative industr

ial policy

Susta

inable

industr

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usin

ess E

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ntr

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Fin

ance a

nd

Investm

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Export

perf

orm

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Public

adm

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112

Figure 4.3: Manufacturing sectors – Czech Republic (2010)

�ote: No data available for sectors C12 (tobacco products) and C33 (installation of machinery and equipment)

Source: Eurostat

4.3.1 Introduction

The Czech economy contracted in 2012, having

continued to shrink for four consecutive quarters.

Domestic demand has been significantly hit by

increases in energy and food prices, continued

fiscal consolidation and weak wage growth. The

outlook for 2013 is one of stagnation, with

domestic demand expected to remain weak. The

industrial sector represents an important segment of

the economy, measuring approximately 38 % of the

Czech economy and employing around 40 % of the

active population.

The manufacturing sector plays a very important

role in the economy, representing 24.7 % of value

added in 2012, compared to the EU average of

15.3 %. The main sectors of importance are the

chemicals, pharmaceuticals, petroleum, mineral and

rubber sector, accounting for approximately

20.4 %; the electronics, electrics and machinery

sector, representing 19.1 % and the cars and

transport sector, with approximately 17.3 % of the

total for 2009.

Data from 2010 shows that labour productivity per

person employed has been declining and was again

negative in 2012. The 2013 Global Benchmark

report also shows that labour productivity in 2012

was below OECD and Eurozone averages, and that

growth in labour productivity in 2008-12 was

almost negligible.


Innovation

According to the 2013 Innovation Union

Scoreboard,49 the Czech Republic is classified as a

moderate innovator. R&D (research and

development) intensity has been increasing steadily

between 2009 and 2011. In fact, business related

R&D as a percentage of GDP increased to 1.11 %

in 2011 compared to 0.96 % in 2010 and 0.88 % in

2009. The relatively good performance of the

research and innovation system is largely due to a

strong manufacturing sector with industrial

specialisation in innovative sectors such as motor

vehicles and electrical equipment along with an

increasing level of R&D financed from abroad.50

However, the R&D investment faces a number of

challenges. These are to increase the motivation and

competencies of businesses to move to become

innovation leaders in their markets; to achieve or

49 http://ec.europa.eu/enterprise/policies/innovation/facts-

figures-analysis/innovation-scoreboard/index_en.htm. 50 For details see “Research and Innovation performance in

EU Member States and Associated Countries, Innovation Union progress at country level, 2013”.

http://ec.europa.eu/enterprise/policies/innovation/facts-figures-analysis/innovation-scoreboard/index_en.htm



113

maintain excellence in selected areas of research; to

enhance the quality of education system; and to set

up an appropriate institutional framework. There is

no overall authority effectively to govern the R&D

and innovation system. While there is a research,

development and innovation council, which acts as

an advisory body, there is a lack of back-office

support to implement strategies. There is also still

little co-operation between research institutions and

businesses, which is hindering economic progress.

The international competitiveness strategy 2012-20

is trying to address these shortcomings, and the

government has proposed practical training for

students of upper secondary and higher education.

Competence centres have been set up, aiming at

encouraging medium to long-term partnerships

between the public and private sectors on research

and innovation. A first call was undertaken in mid-

2012, with a significant amount of proposals being

submitted and 22 projects being selected. A second

call was undertaken in March with 12 to 16 projects

aimed at being supported.

Most research and innovation support for

businesses are grants, in particular through the

Alpha programme, which has the largest available

financial resources, the Beta and Omega

programmes which are administered by the Czech

Technology Agency. Other useful programmes

include the TIP (technology, information systems

and products) programme and the operational

programme entrepreneurship and innovation.

During 2011 and 2012, a number of projects were

successfully carried out under the knowledge

transfer partnership pilot project, introduced in

2009, to support the transfer of knowledge between

universities and SMEs. The Government is

currently considering whether this project should be

extended on a larger scale in the next programming

period.

In addition, there is an R&D tax incentive which

has been recently amended to extend the scope of

eligible expenses to outsourced R&D, but this is not

yet in force. Finally, while the Government has set

an R&D target of 1 % of GDP by 2020 for public

expenditure, which increased from 0.58 % in 2010

to 0.78 % in 2011, it is has not set an overall R&D

target to cover both private and public R&D.

Skills

The quality of compulsory and tertiary education is

currently an issue, and as such it has been the scope

of a country-specific recommendation from the

Council. While performance is better than the EU

headline target regarding early school leaving,

measuring 5.5 % in 2012 as compared to the EU

target of 10 %, its tertiary attainment rate is

significantly lower than the EU average.

Nevertheless, from 2006 to 2012 it has nearly

doubled to 25.6% (EU average of 35.7%), covering

some distance towards the national 2020 target of

32%, which is likely to be achieved.

On ICT skills, 51% of 16-24 years-old have high

computer skills (2012), above the EU average of

40 %.51 With respect to entrepreneurship, only

39.2 % of Czechs believe that they have the

required knowledge, skills and competence to set

up a business which is rather low compared to other

EU countries.52 There have also been calls from

stakeholders for more attention to be given to

support entrepreneurship in schools, notably at

university level.

The Government is preparing a revision of the

higher education act which aims at amending the

accreditation procedure from 2016, notably to help

develop more professionally-oriented bachelor

degrees to improve the labour market relevance of

higher education. Another goal is to link funding of

higher education institutions to their performance.

Generally students at schools are obtaining results

comparable to international educational

achievements, but in mathematics and science the

outcomes have worsened over time. In response,

the authorities are developing minimum standards

and a national computer-based testing. Another set

of measures aim at improving the quality and

attractiveness of teaching through increasing initial

salaries and developing a new career system and in-

service training for pedagogical staff from 2015.

Sustainability

In the last decade, industrial production has

decreased and there has been a continuing decline

in electricity generated from coal-burning power

plants. However, given the significant share of

51 Eurostat ICT household survey. 52 2011 Global Entrepreneurship Monitor.


114

industry in the national economy, the country

remains highly energy intensive. In fact, data for

2010 shows that industry accounts for

approximately 34.2 % of energy consumption in the

economy, while transport accounts for

approximately 24.6 %.53 When compared to other

Member States, data for 2011 shows that it is the

one of the most energy and carbon intensive

Member States in the industry and energy sector.

As a result, the energy intensity of the economy is

still amongst the highest in the EU. Nuclear power

and solid fuels account for almost 90 % of gross

electricity consumption. In 2012, a proposal for an

update of the state energy strategy was adopted by

the Government.54

The share of renewable energy in gross final energy

consumption for 2011 measured 9.4 %.55 The

renewable energy target is 13 % by 2020, with a

10 % target of renewables in all modes of transport.

Investment has been made in wind and photovoltaic

generation over the past years. The national

renewable energy action plan seeks to development

renewable energy sources but these are not

considered to be strong in all sectors, particularly in

transport and grid reinforcements.56

An updated raw materials policy, also covering

secondary raw materials, was prepared in the

summer of 2012 but has not yet been approved.

Amongst the goals of this policy is to create the

conditions to secure reserves and sustainable

extraction of raw materials and to support material

saving technologies.

The most prominent eco-innovation areas are waste

management, small scale hydropower technologies,

and specific developments in nanotechnologies.

There are initiatives on improving energy efficiency

of buildings and development of cleaner vehicles. It

is pertinent to note however that the Czech

Republic has still not set its energy efficiency target

under the Europe 2020 strategy which was due in

April 2013.

53 Country factsheets of DG Energy (2012):

http://ec.europa.eu/energy/observatory/countries/doc/2012-country-factsheets.pdf.

54 Government Resolution no 803/2012. 55 Eurostat data. 56 Europe2020 Staff Working Document for the Czech

Republic.

By the end of 2013 the Government is aiming to

present a waste prevention programme. Some goals

of the waste prevention plan will be part of the

newly prepared waste management plan. Currently

the country relies significantly on landfilling of

municipal waste.


Exports accounted for approximately 75 % of GDP

in 2012, with approximately 6 % annual growth

rate in 2008-12, which is higher than the OECD and

Eurozone averages.57 The total value of exports

from the Czech Republic has steadily increased

from 2009 with the internal EU market representing

approximately 83 % of the total in 2011.58 Germany

is a particular important destination. The share of

high-tech exports in total exports measured 16.2 %

in 2011.

The Czech export strategy 2012-20 remains the

Government’s strategic document aimed at

improving export performance. The strategy

focuses mainly on SMEs, aiming at increasing the

number of SMEs exporting to third markets by

50 % by 2020. An annual progress report was also

prepared. CzechTrade is the Government agency

responsible for export promotion with over 30

offices worldwide. It is envisaged that a one-stop-

shop for exports will be set up to offer information

to interested entrepreneurs in various regions.


administration


The ownership of the competitiveness strategy

2012-20 has moved to the Office of the

Government from the Ministry of Industry and

Trade, which should allow for improved execution

given the co-ordination role of the Office of the

Government.

The SME support strategy for 2014-20 was

launched and adopted by Government in December

2012. The strategy sets out 50 specific measures

and defines the priority areas for support for the

2014-20 programming period. The four policy

57 Global Benchmark Report 2013. 58 Czech Statistics Office.

http://ec.europa.eu/energy/observatory/countries/doc/2012-country-factsheets.pdf

http://ec.europa.eu/energy/observatory/countries/doc/2012-country-factsheets.pdf


115

priorities are enhancing business environment;

development of enterprise based on R&D and

innovation; SME internationalisation; and

sustainable energy management and development.

According to the World Bank Doing Business

Report 2013, the Czech Republic ranks 65th on ease

of doing business out of 185 countries. Some of the

main bottlenecks for businesses identified relate to

starting a business,59 getting electricity, protecting

investors and paying taxes.

As in many other Member States, the tax rates

change often, placing additional administrative

burden on businesses. The establishment of a single

tax collection point for personal and company

income taxes should start operating in 2015,

focusing on the collection of direct taxes and health

and social insurance contribution in one place. This

should help to reduce the administrative burden of

paying taxes, even though it is not cover all types of

taxation.

There are also a number of services which aim at

assisting businesses, in particular SMEs, such as the

points of single contact (PSC), SOLVIT centres and

the contact point for products that have been

integrated into a single platform through the

internet portal for entrepreneurs.60

In 2012, the Government carried out a successful

pilot project on the introduction of common

commencement days. The project foresees the

introduction of the majority of legal acts concerning

the business environment on two days only, namely

1 January and 1 July, thus decreasing uncertainty

and administrative burden. The evaluation of the

pilot project should be submitted to the

Government for a decision on whether the common

commencement days will be introduced on a

broader scale.

There have been a number of legislative acts

recently which may have a positive effect on the

business environment, such as the new act on

business corporations, which is to be effective from

2014. This act should provide improvements for

limited liability companies. There have also been

59 World Bank Doing Business 2013 calculates that it takes

20 days to start a business in the Czech Republic. The Czech Republic disputes this figure, stating it takes 10 days to start a business.

60 Businessinfo.cz.

amendments to the trade licensing act. Moreover, a

new law on investment incentives extended the

five-year reduction in corporate tax rate to a 10-

year period.

Services account for approximately 58 % of the

total value added.61 The importance of services is

also reflected in the fact that according to data for

2011, export of services as a percentage of total

exports accounted for 16.3 % as opposed to 6.6 %

of goods accounting for total exports.

The Czech Republic is the Member State with the

highest number of regulated professions. A public

consultation on the review of the regulatory

framework for professions has been conducted in

2012 and results are to be presented in 2013.62

The transport infrastructure faces challenges with

respect to its quality and functionality and as such it

hinders possible economic growth. As highlighted

in the 2013 national reform programme, the

completion of backbone infrastructure, and

connecting remaining regions and main industrial

centres to Czech and European routes is a pre-

requisite to improving the business situation.

The transport system suffers from a lack of

interconnectivity between railways and other forms

of transport. Given the difficult economic climate,

the completion of planned rail and highway projects

is now uncertain. The government intends to adopt

a new transport policy for 2014-2020, as well as a

medium-term plan of transport infrastructure

development, both of which should improve the

strategic planning in transport development.


Issues relating to public administration and

corruption are some of the most pressing issues for

the Czech Republic. In June 2013, a draft public

servants act was approved by the Government (an

act had been approved in 2002 but entry into force

was postposed). In the effort to ensure a stable,

61 OECD Economic Survey Czech Republic November

2011. 62 The 2013 country-specific recommendations for the

Czech Republic included “Drawing on the on-going review, proceed with a reform of regulated professions, by reducing or eliminating entry barriers and reserves of activities where they are unjustified.” http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/index_en.htm

http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/index_en.htm



116

more transparent and professional public service, it

should be noted that a strategic policy framework

for reinforcing the administrative efficiency with

several elements to be put in place an process of

being implemented is known as ex-conditionality

for the use of EU funds in 2014-20.

Another important area of action is to ensure the

appropriate enforcement of the public procurement

act which was substantially amended on 1 April

2012. The adoption of this amendment was a good

example of wide consultation between government,

businesses and NGOs. While Government advisory

and support services for bidders currently exist, the

time taken to respond to requests is still quite long

(in particular the capacity of the office for the

protection of competition is not sufficient). Further

administrative capacity at local and regional level

would be useful.

The Czech Republic also permits anonymous

shareholding, whereby a lack of transparency of

ownership of shares can lead to issues related to

corruption, money laundering and tax evasion. A

legal act to address this has been approved by

Parliament.63 According to it, bearer shares will

now be permitted to exist, but only if they are

deposited in the collective depository of a securities

trader, the records of which allow for the

identification of share ownership, with access

limited to selected public authorities. Measures will

enter into force in 2014.

There is a two-year anti-corruption strategy, with

the strategy for 2013-14 building on that of 2011-

12. While a number of measures have been

completed, a significant amount of legislative

proposals from the previous strategy were

transferred to the new strategy. Even though

monitoring is done on a quarterly basis, the

department dealing with this strategy within the

Office of the Government has limited resources and

limited political clout when measures are not

fulfilled.

The administrative burden on businesses has been

reduced by 23 % by the end of 2012, when

compared to 2005 levels, narrowly missing the

25 % target. An eco-audit exercise is being

continued which aims at reducing unjustifiable

administrative and finance burdens on businesses 63 Law No 134/2013 Coll.

with respect to environmental legislation. Efforts

were also undertaken to consult with the business

sector on the most troublesome issues for

entrepreneurs.

Finally, in July 2012, the basic registry system, i.e.

the unifying of fragmented data stored by public

authorities, came into operation. As a result there

has been a rise in e-government use to 92 % of

businesses in 2012.


SMEs tend to suffer the same difficulties in access

to finance as in other Member States, including

difficulties to obtain credit due to lack of collateral,

short business history etc. Moreover, the current

economic climate is causing banks to be more risk-

averse, leading to banks tightening credit. Banks

have recently launched a guarantee facility for

innovative start-ups. These types of projects tend to

be aimed towards companies with a high return and

have been taken up by solar energy, ICT, and

machinery sectors.

However, there is also a lack of seed and growth

capital, and so equity financing has been limited.

The Government, however, is to launch a venture

capital fund financed through the operational

programme enterprise and innovation. The fund

will have EUR 53 million at its disposal and

financing will go towards early stage financing and

growth capital. EUR 31.7 million will be dedicated

to early-stage funding, while the remaining EUR 21

million will go to growth capital, for more

developed companies. Private co-financing will

consist of 30 % for those applying for the seed

financing and 50 % for the growth financing. There

is significant interest from SMEs to take up these

funds. The aim is for the funds to become

operational at the end of 2013.

With respect to foreign direct investment, the

inflow was the highest in the last five years.

Investors have increased mostly reinvested profits

but also equity of their companies.64 The strong

inflow of direct investment has resulted in a

significant surplus in the financial account of the

balance of payments.

64 Czech Statistical Office.


117

4.3.6 Conclusions

Issues pertaining to public administration, such as

an effective implementation of the anti-corruption

strategy and a robust public servants act, are some

of the major challenges. Sustainable industry and

improving the quality of education and skills are

also areas where there are significant challenges.

On the other hand, with respect to business

environment, it is encouraging that a venture capital

is being set up by the Government, given the lack

of such instruments in the past. There is keen

interest in this by enterprise and is likely to be taken

up rapidly.

Country chapter: Denmark

118

4.4. Denmark

-3 -2 -1 0 1 2 3





























Denmark

2007

latest available


Innovative industr

ial policy

Susta

inable

industr

yB

usin

ess E

nvir

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ent and E

ntr

epre

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hip

Fin

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Investm

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Export

perf

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Public

adm

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N.A.;

N.A.; N.A. (2007)

N.A.;

N.A.; N.A. (2007)


119

Figure 4.4: Manufacturing sectors – Denmark (2010)

�ote: No data available for sectors C15 (manufacture of leather and related products) and C19 (coke and refined petroleum products).

Source: Eurostat

4.4.1 Introduction

Denmark is a small and wealthy65 open economy

that is also very competitive. Its GDP contracted

0.5 % in 2012 but the outlook for 2013 and 2014 is

positive, although the wider prospects for the EU

economy will strongly influence this. The three

largest Danish manufacturing sectors represent both

knowledge-intensive (electronics, electric and

machinery, chemicals and pharmaceutical), and

traditional sectors (food).

Competitiveness has deteriorated in the past

decade. Real wage growth has exceeded

productivity growth and unit labour costs have

increased by around 20 %. The need to improve

competitiveness and productivity has been the

topics of considerable debate and the government

set up a productivity commission66 to identify the

major drivers and the main barriers. The mandate of

the committee lasts until the end of 2013, but it is

issuing policy recommendations along the way. The

commission has confirmed that productivity growth

in the domestic Danish services sector has been

slower than in countries like Germany, Sweden and

65 GDP per capita is 56 147 USD; ‘Global Competitiveness

Report 2011-12’, World Economic Forum. 66 Produktivitets Kommissionen,

http://produktivitetskommissionen.dk/publikationer.

the Netherlands. Productivity growth in

manufacturing is in line with global developments,

as Danish businesses operate in competitive

markets.

To improve the conditions under which businesses

operate, the government has also set up business-

government task forces (growth teams) to make

recommendations in eight key sectors where Danish

businesses have traditionally been strong. These are

tourism, food, energy and climate, health and

welfare solutions, creative industries,

water/bio/environmental solutions, ICT, and

maritime industries. So far the task forces have

made proposed initiatives in the areas of regulating

better, improving public-private partnerships,

attracting more foreign investment and focusing on

export and branding.


Innovation

The Innovation Union Scoreboard 2013 classifies

Denmark as an innovation leader. The national

research intensity target is 3 %, of which 2 % should

come from the private sector, and 1 % from the

public purse. The same target was in place in 2006-

12 and has been reached. The research and

http://produktivitetskommissionen.dk/publikationer


120

innovation system functions well, with dedicated

councils and funding schemes, ranging from basic

research to commercialisation and

entrepreneurship.67

The new innovation strategy that was launched in

December 2012 aims to improve effectiveness and

increase productivity. The strategy involves moving

to a simpler and more flexible research and

innovation system, in particular through the

integration of the existing research bodies. It also

focuses on research and development (R&D)

initiatives to support advanced manufacturing, such

as automation and robot technologies. By 2020, the

policy aim for Denmark is to be among the top five

OECD countries in terms of the proportion of

innovative firms, level of business investment in

R&D, and the proportion of firms that employ

highly-skilled workers. Reaching this goal would

require strong, consistent and long-term policies

Commercialisation of research is one of the weak

points of the Danish research and innovation

system, in particular taking new technologies into

marketable products. Stronger links between

research and businesses and more effective

knowledge transfer could help in combining

business skills to research and innovation

competencies. In practice, work along these lines is

progressing, and some of the Danish research

centres provide good examples of effective

cooperation.

Skills

On skills and education, Denmark has already met68

its two headline objectives of the Europe 2020

strategy, as early school leaving rate was 9.1 %, and

tertiary attainment rate was 43 % (2012). However,

the education system could be more cost-effective,

there is a lack of apprentice places, and drop-out

levels are high. Denmark is above the EU targets in

reading, mathematics and science, but the

performance in mathematics worsened significantly

between 2006 and 2009, whereas the share of low-

achievers in reading and science fell during the

same period.

67 ERAC Peer Review of the Danish Research and

Innovation System Outcomes Report 2012. 68 ‘Rethinking education’, European Commission 2013.

To address the deficiencies, the main skills

initiatives are the youth package of August 2012

and the reform of the public school system

launched in December 2012. The youth package

finances job rotations and apprenticeship

programmes to help young people improve their

skills to match industry demand.

The aim of the school reforms is to reduce early

school leaving through more hours spent on core

subjects such as Danish, maths and English, and

more emphasis on practical training.69 Furthermore,

a committee of experts, including representatives of

trade unions and employers, is due to make

proposals in autumn 2013 to find a solution to the

problem of a lack of private apprenticeships and

high drop-out rates. There are discussions on

introducing flexible, shorter vocational training

cycles for the most vulnerable learners. Denmark is

one of the EU leaders in adult participation in

lifelong learning with a rate of 31.6 % in 2012

against an EU average of 9 %.

Sustainability

The national energy efficiency action plan sets out

the energy efficiency policies required to reach the

2050 target of achieving independence from fossil

fuels. Steps have been taken to increase the energy

efficiency of public buildings, increase green

procurement and make energy consumption and

energy savings more transparent. A long-term

roadmap sets out how the minimum energy

performance standards of buildings will be

improved. Some of the policies that apply to

industry include energy saving obligations and

higher tax rates for energy. Cars are also subject to

a high tax rate, as part of the ‘green transport’

policy.


Danish exports are characterised by the large

proportion of food and beverages, albeit with a

focus on the higher value segments of these

markets. Exports of high-tech, higher value added

69 The country-specific recommendation no 2 of 2013

specifically concentrated on the Danish education system. http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/index_en.htm.




121

products have grown, although at a slower pace

than in many competing countries.

Between 2000 and 2012, Denmark lost export

market share in goods, partly reflecting the

deteriorated competitiveness.70 More than two

thirds of exports go to other EU countries. Certain

sectors, including renewable energies and

pharmaceuticals, are likely to benefit from

increasing demand from outside Europe. However,

exports to the BRIC countries (Brazil, Russia,

India, and China) have not grown in line with the

opportunities provided by these countries, and the

government developed strategies to improve trade

and investment cooperation with them. It is also

focusing on its strengths and competencies in fields

such as climate and energy, architecture, research,

education and food.71


administration


An annual survey of investors72 tries to identify the

features of the economy that are the most attractive

for foreign businesses. The latest survey cited the

competent workforce as the most important reason

for investing in Denmark. Other reasons were R&D

competence, market access to Nordic countries and

to the EU in general, the flexible labour rules, and

the quality of infrastructure and services. The high

level of taxes and the high living costs were

investors’ main concerns.

The national regulatory framework is being

examined with a view to making life easier for

SMEs. A business forum advises the government

on how to reduce the administrative burden, and an

on-going impact assessment programme seeks to

ensure a net reduction in that administrative burden.

Furthermore, the Danish authorities have

established a market development fund to promote

growth, employment and exports, help SMEs to

70 ‘In-depth review for Denmark’, 2013, European

Commission. 71 ’Aftale om Danmark som vækstnation.’ Danish

Government (2011). http://www.fm.dk/Nyheder/Pressemeddelelser/2011/05/~/media/Files/Nyheder/Pressemeddelelser/2011/05/Vaekstnation/Aftaletekst_danmark%20som%20vaekstnation.ashx.

72 ‘Invest in Denmark’, Danish Ministry for Foreign Affairs.

bring new products to market and make it easier for

public institutions to purchase innovative products

and services.

The low level of competition in services and

construction lowers productivity growth and

innovation. For construction, one reason seems to

be the national building standards that make it

difficult for foreign competitors to enter the market.

The government is seeking to address the issue by

enforcing competition legislation better,

modernising authorisation schemes and reforming

the national standards.

The Danish Competition and Consumer Authority

has identified four service markets that should be

further reformed, namely telecommunications,

postal services, taxis and pharmacies. The

competition policy package of October 2012

consisted of initiatives to tighten up the competition

law, including in public procurement. Options for

the liberalisation of pharmacies, taxis and plumbing

services are being analysed, and the extent of the

reforms remains to be decided. A new competition

act came into force in March 2013 that introduced

the possibility of custodial penalties and increased

fines in cartel cases.

The wholesale energy market was liberalised in

1999 and Denmark is part of the Nordic electricity

pool, with continuous spot trading. Since 2003

consumers have been able to switch their electricity

supplier, although only about 20 % have done so.

This has been due in part to regulations restraining

competition,73 in particular fixed retail prices that

do not fluctuate with the wholesale price. A number

of initiatives are expected to increase competition

and the government is considering abandoning the

regulation of the retail electricity prices. In 2014 the

network operators will become wholesale suppliers

of transport capacity, which implies that consumers

will only have to pay one bill regardless of whether

they have switched supplier or not. Smart meters

will be supplied to more than 50 % of users in the

next couple of years, and the government has

recommended that every consumer should have a

smart meter installed before 2020. With smart

meters, consumers will be able to choose a price

that fluctuates with the wholesale price. Taken

73 ‘Detailmarkedet for elektricitet’, Danish Competition and

Consumer Authority, 2011.


122

together, these measures are expected to increase

competition in the retail electricity market.

The tax reforms of 2009 and 2012 are gradually

lowering taxes on labour. In 2013, the government

announced that it would gradually reduce the

corporate tax rate from 25 % to 22 %, reduce excise

duties on energy and packaging, and lower the costs

of waste water, and reintroduce previous tax credits

for construction work in private homes. These

measures have the potential to contribute to

stimulating demand, including for small-scale

construction work.

While it is relatively easy to start a company in

Denmark, stakeholders complain that the

administrative burden increases at the later stages

of firm life. This may be having an effect on the

survival rate of firms, as about half of them cease

operations within five years.74


The public administration system performs well.

The indicators on government effectiveness,

corruption and fraud, business start-up and ease of

acquiring licenses, public procurement, tax

compliance and administration and civil justice are

all better than the EU average.75 Denmark ranks

sixth in the EU in terms of payment delays from

public authorities, with an average payment period

of less than 15 days.76 Widespread use is made of

ICT applications, modern human resources

management techniques and evidence-based

steering and planning instruments.

However, public procurement rules and practices

could be improved, as the burden on firms

participating in tenders is slightly above the EU

average, both in terms of costs and time needed. In

civil justice there seems to be room for

improvement as regards the costs of contract

disputes, including court costs, enforcement costs

and average legal fees.

74 http://erhvervsstyrelsen.dk/file/291799/

Ivaerksaetterindeks-2012-endelig-version.pdf. 75 ‘Excellence in public administration for competitiveness

in EU Member States’, European Commission (2011-12). 76 ‘Industrial policy indicators and analysis — April 2013’,

European Commission.


The financial sector is stable and banks are well

capitalised, but despite this, it seems unlikely that

lending to SMEs will get back to the pre-crisis level

in the near future.77 In 2012, the volume of

outstanding loans to non-financial corporations fell

by 2 % and the cumulative decrease since 2008

amounts to almost 5 %.78 Access to loans has

become increasingly difficult for SMEs since the

beginning of the economic crisis and the rejection

rate for loan applications is 20 %, as against an EU

average of 15 %. The cost of credit for SMEs is

50 % higher than for large companies. This is likely

to deter SMEs from investing in research and

innovation, which will not help in solving the

identified problems with commercialising

research.79 Many newly established businesses find

it particularly difficult to find financing to build

proofs-of-concept, stage technological

demonstrations, and develop pilot lines. Another

potential concern as regards access to finance is that

Danish SMEs are often not well known, making it

difficult for them to attract investment.

The authorities have launched several initiatives80

to tackle the issue of access to finance. In

particular, loans to new businesses with high

growth potential are administered by Vækstfonden,

a fully state-owned investment fund. Second, there

is a credit guarantee scheme for smaller bank loans

of up to DKK 2 million for 2013-15. Third, the

Export Credit Fund will provide guarantees to help

finance export-oriented production facilities in

Denmark.

Furthermore, in the budget negotiations of 2013, an

agreement was reached to establish a special green

guarantee scheme of up to DKK 350 million. The

purpose of this scheme is to improve the conditions

and provide support to SMEs to finance new green

investment in resource efficiency and resource

recycling.

77 Danish Business Authority (ERST). 78 European Commission, Small Business Act Fact Sheet

2012. 79 As set out in the ‘Member States’ Competitiveness

Performance and Policies’ report of (European Commission, 2012).

80 ‘Danish Growth Capital Fund’ (Dansk Vækstkapital, a partially owned state investment fund), the ‘Development Package’ (Udviklingspakken, March 2012) and a ‘Credit Package’ (Kreditpakken, November 2012).

http://erhvervsstyrelsen.dk/file/291799/%20Ivaerksaetterindeks-2012-endelig-version.pdf

http://erhvervsstyrelsen.dk/file/291799/%20Ivaerksaetterindeks-2012-endelig-version.pdf


123

The latest initiative being launched by the Danish

government is the Growth Plan DK (April 2013)

that aims to improve the conditions under which

businesses operate. Several of the plan’s initiatives

target access to finance for SMEs, including

boosting the small growth guarantees by an

additional DKK 350 million. A new type of loan

will target skilled entrepreneurs with solid business

projects, providing additional funding of about

DKK 1 billion in 2015-17. The guarantee capacity

of the Export Credit Fund has been increased, with

a further DKK 15 billion made available to finance

export projects and investment.

The government is also preparing a legislative

proposal to improve the Danish corporate bond

market. Legislation will be presented this year that

would allow the use of a representative (‘trustee’)

for bond issues. The government will also give

banks more opportunities to securitise corporate

loan portfolios.

4.4.6 Conclusions

Denmark is one of Europe’s most competitive

economies, with highly skilled workforce, strong

research and innovation capacity, flexible labour

rules and high-quality infrastructure as its strong

points. Danish exports are diversified, and

government policies seek to build on the identified

strengths. However, in the longer term, some

weaknesses in the education and training system

could endanger its position.

There is scope for improvement in the research and

innovation environment, as better links between

research and businesses could help investment in

research and innovation to be more effective. In this

spirit the new innovation strategy that was launched

in December 2012 aims to improve effectiveness

and increase productivity. Further, the low level of

competition in services and construction restricts

productivity growth and innovation and measures

are being taken to enforce competition legislation

and removing obstacles from competition.

The Danish public administration works well and

widespread use is made of ICT applications,

modern human resources management techniques

and evidence-based steering and planning

instruments.

In line with other Member States where access to

finance is a problem, the government has taken

measures to improve the provision of publicly

funded financial instruments for SMEs and widen

the potential financing sources, in particular for

SMEs.

Country chapter: Germany

124

4.5. Germany

-3 -2 -1 0 1 2 3





























Germany

2007

latest available


Innovative industr

ial policy

Susta

inable

industr

yB

usin

ess E

nvir

onm

ent and E

ntr

epre

neurs

hip

Fin

ance a

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Investm

ent


Export

perf

orm

ance

Public

adm

inis

tration

3.6

N.A.; N.A. (2007)

N.A. (2007)


125

Figure 4.5: Manufacturing sectors – Germany (2010)

Source: Eurostat

4.5.1 Introduction

Manufacturing plays an important role in the

German economy and contributes 22.3 % to the

total value added, as compared with an average of

15.3 % in the EU as a whole.81 Germany is

particularly specialised in technology-driven and

capital-intensive industries. The World Economic

Forum’s Global Competitiveness Report ranks the

country in fourth place.82 Cost competitiveness has

improved over the last decade, as indicated by a

depreciation of the real effective exchange rate.

Labour productivity per hour worked is about 24

percentage points above the EU average and about

11 percentage points above the euro-area average.83

Overall, industry is very competitive, although it

faces important challenges in securing its

competitive position in both the medium and long

term.

81 Eurostat data for 2012. 82 http://www.weforum.org/issues/global-competitiveness. 83 Eurostat data for 2012.


Innovation

The Innovation Union Scoreboard 201384

confirmed Germany’s position among the

‘innovation leaders’ of the EU.85 Despite the overall

good performance, a decline was observed in non-

R&D innovation expenditure and sales of new-to-

market and new-to-firm innovations. The capacity

of Germany’s industry to innovate – and to remain

at the technological frontier – is of increasing

importance in securing Germany’s competitive

position. Innovation strategies of small and

medium-sized enterprises (SMEs) often concentrate

on high value added and high-quality products in

niche markets. The resulting innovations are often

modifications or further developments, and not so

much real market innovations.86

Germany is close to achieving its R&D expenditure

target of 3 % of GDP,87 but some leading

economies are investing even more in research and 84 Innovation Union Scoreboard 2013,

http://ec.europa.eu/enterprise/policies/innovation. 85 Together with Denmark, Finland and Sweden. 86 KFW Economic Research, To be the leader of the pack?

Innovation strategies in the SME sector, November 2012 https://www.kfw.de.

87 R&D intensity in 2011: 2.9 % of GDP with about two-thirds by the private sector (Eurostat).

http://www.weforum.org/issues/global-competitiveness


https://www.kfw.de/Download-Center/Konzernthemen/Research/Research-englisch/Fokus-PDF-Dateien/F-Nr.-11-November-2012.pdf


126

innovation, and emerging markets are catching up

in traditional areas of competence. The Expert

Commission on Research and Innovation appointed

by the federal government has recommended

increasing the R&D expenditure target to 3.5 %.88

Moreover, significant disparities exist at regional

level in terms of R&D investments as well as

innovation performance.

The High-Tech Strategy 202089 defines the central

goals of research and innovation policy. It

concentrates public R&D resources for scientific

and technological research in areas that face

particular global challenges.90 The strategy also

supports the development of key enabling

technologies, which act as drivers of innovation and

provide the basis for new products, processes and

services. Some stakeholders consider that the

strategy could be further strengthened, including by

increasing awareness and involvement of SMEs.91

The Central Innovation Programme for SMEs92 has

been a success in helping SMEs, in particular in

enhancing their research and innovation efforts to

develop new products, processes and services. Over

10 000 companies have been supported so far.93

Skills

Skill shortages are emerging in various sectors and

regions; these are becoming an increasingly

important obstacle to future growth and innovation

performance, in particular for SMEs.94 A way to

alleviate these shortages would be to labour market

participation through better the education and

88 Expertenkommission Forschung und Innovation (EFI),

ʻJahresgutachten zu Forschung, Innovation und

technologischer Leistungsfähigkeit Deutschlands 2013ʻ. http://www.e-fi.de/gutachten.html.

89 High-Tech Strategy 2020 for Germany http://www.hightech-strategie.de.

90 These include energy and climate protection, health and nutrition, mobility, security and communication.

91 http://www.e-fi.de/gutachten.html and http://www.dihk.de/innovationsreport.

92 ʻZentrales Innovationsprogramm Mittelstandʼ http://www.zim-bmwi.de. For 2013, the planned annual budget is EUR 500 million, which is estimated to finance about 5 000 new applications.

93 The Association of German Chambers of Commerce and Industry identifies the programme in its ‘Innovation Report 2012’ as a ‘best practice’ example; http://www.dihk.de.

94 See also the Staff Working Document ‘Assessment of the 2013 national reform programme and stability

programme for Germany’, http://ec.europa.eu/europe2020.

training.95 Current initiatives on skills have

recognised that mobilising domestic labour

potential will not be sufficient and that economic

progress will also depend on attracting skilled

workers from other EU and non-EU countries. The

introduction of a nationally standardised system for

the assessment of qualifications acquired in foreign

countries helps in this respect.96

A recent report noted some positive developments

but also highlighted that further progress will be

necessary.97 Measures include an information

campaign98 and a web portal99 to provide

information on job opportunities and the conditions

for taking up employment in Germany. The

University Pact aims to better use all available

capacities; the “Qualitätspakt Lehre” improves

teaching; and the “Ausbildungspakt” has been

extended until 2014 to ensure additional 60 000

training places a year. A competence centre has

been established to support SMEs in attracting and

retaining skilled employees.100 Moreover, a new

employment regulation aims to make it easier for

medium-skilled people to work in Germany,

supplementing the ‘blue card’ for highly-qualified

workers introduced in 2012.

Sustainability

Overall, the environmental performance of industry

can be characterised as good, but further

improvements should still be possible. Green

technologies, products and services play an

increasingly important role. In 2012, about 34 % of

companies offered green products or services,

compared to 26 % in the EU.101 In 2012, a resource

efficiency programme102 was adopted, aimed at

further improving the environmental performance

of industry. The dependence on high quality raw

materials of many industry sectors, and further

95 Commision Staff Working Document to assess the

National Reform Programme 2013. 96 Bundesarbeitsagentur ʻPerspektive 2025: Fachkräfte für

Deutschlandʼ, http://www.arbeitsagentur.de.; Berufsqualifikationsfeststellungsgesetz (2011).

97 ʻFortschrittsbericht 2012 zum Fachkräftekonzept der

Bundesregierungʻ http://www.bmas.de. 98 ʻFachkräfteoffensiveʻ http://www.bundesregierung.de. 99 http://www.make-it-in-germany.com. 100 ʻKompetenzzentrum Fachkräftesicherung, Unterstützung

für kleine und mittlere Unternehmenʻ http://www.kompetenzzentrum-fachkraeftesicherung.de.

101 Flash Eurobarometer 2012, European Commission, http://ec.europa.eu/public_opinion.

102 ʻDeutsches Ressourceneffizienzprogramm (ProgRess)ʻ,

http://www.bmu.de.

http://www.e-fi.de/gutachten.html

http://www.hightech-strategie.de/en/350.php

http://www.e-fi.de/gutachten.html

http://www.dihk.de/presse/meldungen/2012-12-21-innovationsreport

http://www.zim-bmwi.de/download/infomaterial/zim-presseinfo_01-12.pdf

http://www.dihk.de/presse/meldungen/2012-12-21-innovationsreport

http://ec.europa.eu/europe2020

http://www.arbeitsagentur.de/zentraler-Content/Veroeffentlichungen/Sonstiges/Perspektive-2025.pdf

http://www.bmas.de/SharedDocs/Downloads/DE/PDF-Pressemitteilungen/2013/fortschrittsbericht-fachkraefte-2013-01.pdf?__blob=publicationFile

http://www.bundesregierung.de/Content/DE/Artikel/2012/06/2012-06-05-fachkr%C3%A4fte-offensive.html

http://www.make-it-in-germany.com/en/home/

http://www.kompetenzzentrum-fachkraeftesicherung.de/ueber-das-kompetenzzentrum-fachkraeftesicherung/

http://ec.europa.eu/public_opinion/flash/fl_342_fact_de_en.pdf

http://www.bmu.de/themen/wirtschaft-produkte-ressourcen/ressourceneffizienz/progress-das-deutsche-ressourceneffizienzprogramm/


127

price increases, could weigh on the competitiveness

of German industry in the future.

The new energy strategy opens the door to new

growth opportunities for German industry, but it

also involves significant challenges. Electricity

prices are already among the highest in Europe.103

If the energy strategy is to be successful, overall

economic costs need to be minimised, including by

increasing the cost-effectiveness of renewable

energy, by stimulating competition in energy

markets, by further enhancing energy efficiency

and by improving the coordination of its energy

policy with neighbouring countries. The timely

deployment of the required infrastructure is an

important prerequisite for achieving the strategy’s

objectives.104

Due to its size, the public procurement system has

considerable potential to support the deployment of

environmentally friendly products. Public

procurement is increasingly integrating innovation

and sustainability aspects.105 For example, current

legislation requires high standards of energy

efficiency performance.106 Since 2012, a

competence centre has assisted federal, regional

and local administrations in integrating

sustainability aspects in their procurement

processes. In addition, in early 2013, a competence

centre for innovative public procurement was

launched.107


Overall, Germany accounts for 23.6 % of EU

exports.108 In 2012, motor vehicles and their parts

were the main export products (accounting for

17.3 % of exports), followed by machinery (15.0 %)

and chemical products (9.5 %). About 69 % of

exports went to European countries. The second

most important sales market was Asia (about 16 %),

followed by the Americas (about 12 %). In 2012,

103 DG Energy, Market observatory & Statistics:

http://ec.europa.eu/energy/observatory/index_en.htm. 104 See also the Staff Working Document Assessment of the

2013 national reform programme and stability programme for Germany, http://ec.europa.eu/europe2020.

105 Allianz für nachhaltige Beschaffung, http://www.bmwi.de. 106 �ovellierte Vergabeverordnung (VgV), 20 August 2011. 107 http://bmwi.de/DE/Themen/Technologie/innovation-

beschaffungswesen.html. 108 Eurostat, 2012.

exports increased by 3.4 %.109 Compared with the

EU average, German SMEs tend to be more active

internationally110 and their relatively strong

presence in emerging markets indicates further

growth potential.

The federal government supports the

internationalisation of businesses, especially SMEs,

through a wide range of measures, including by

providing information about key export markets

and customs procedures, but also through trade fairs

and export credit guarantees.111 Of particular

importance is the support provided by chambers of

commerce and other craft and business

associations, both in Germany and abroad. The

iXPOS internet portal112 serves enterprises as a one-

stop shop for information on how to expand their

business abroad. In recent years, the initiative ‘new

target markets’113 has focused on increasing the

presence of German businesses in new emerging

markets beyond the BRIC countries.


administration


In general, the business environment is favourable,

encouraging the competitiveness of enterprises,

although there may still be scope for further

improvement in some areas. It scores particularly

well for overall satisfaction with the quality of

infrastructure, while it is around average for the

administrative burden of the regulatory

framework.114

The business environment is also favourable for

entrepreneurial activities, and there are federal and

regional programmes in place to support the

development of SMEs through a broad range of

services. Due to low unemployment, emerging skill

shortages and demographic trends, however, the

number of entrepreneurs115 is expected to decline

109 Statistisches Bundesamt, https://www.destatis.de. 110 Small Business Act Fact Sheets, European Commission,

http://ec.europa.eu/enterprise/policies/sme. . 111 http://www.bmwi.de/DE/Themen/Aussenwirtschaft. 112 http://www.ixpos.de. 113 Initiative �eue Zielmärkte

http://www.bmwi.de/DE/Themen/Aussenwirtschaft. 114 Germany is ranked 20th of 185 in the World Bank Doing

Business 2013 report. 115 DIHK-Gründerreport 2012, http://www.dihk.de.

http://ec.europa.eu/energy/observatory/index_en.htm


http://www.bmwi.de/DE/Mediathek/publikationen%2Cdid=545364.html

http://bmwi.de/DE/Themen/Technologie/Rahmenbedingungen/innovation-beschaffungswesen.html

http://bmwi.de/DE/Themen/Technologie/Rahmenbedingungen/innovation-beschaffungswesen.html

https://www.destatis.de/EN/FactsFigures/NationalEconomyEnvironment/ForeignTrade/OverallDevelopment/Current.html;jsessionid=F5D225E5C13ADF8626A819123E5F5B66.cae3

http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/index_en.htm#h2-2

http://www.bmwi.de/DE/Themen/Aussenwirtschaft/Aussenwirtschaftsfoerderung/aussenwirtschaftsfoerderunginstrumente.html

http://www.ixpos.de/IXPOS/Navigation/DE/ihr-geschaeft-im-ausland.html

http://www.bmwi.de/DE/Themen/Aussenwirtschaft/initiative-neue-zielmaerkte.html

http://www.dihk.de/


128

further, which could hamper Germany’s future

growth and innovation performance. Moreover,

women still represent only one-third of

entrepreneurs, indicating further untapped potential.

A systematic integration of entrepreneurship in the

school curriculum could contribute to reversing this

trend.

Germany is systematically assessing the

administrative burden associated with newly

proposed regulations at federal level. An expert

committee scrutinises new legislative proposals and

publishes an index of estimated overall changes in

compliance costs.116 According to this index,

overall compliance costs have increased by

EUR 1.3 billion since 2011. So far, not all the

simplification measures agreed by the federal

government in December 2011 have been

implemented.117 Defining a new target for

additional simplification measures could help

stimulate this process. Recently, there has been

progress in defining standards for e-government

and electronic invoicing.

Overall, the tax system is relatively complex. While

Germany still scores slightly better than the EU

average in terms of the tax compliance burden,

SMEs in particular would benefit from further

simplification. Despite the complexity of the tax

system, the corresponding administrative costs are

less than the EU average.118

There is scope for further increasing competition in

the services sector.119 While competition has

increased noticeably in telecommunications, it

seems to be making less headway in other sectors,

including in particular postal and railway

services.120 In 2012, the long-distance bus transport

market was partially opened up, which may in time

contribute to stimulating competition in the

passenger transport sector. Market transparency

agencies are currently being set up to ensure better

116 http://www.normenkontrollrat.bund.de. 117 Eckpunkte zur weiteren Entlastung der Wirtschaft von

Bürokratiekosten, 14 December 2011 http://www.bundesregierung.de.

118 Paying Taxes Report 2013, World Bank. Costs measured as a percentage of tax receipts: Germany 0.8 %, EU average 1.3 %.

119 See also the Staff Working Document Assessment of the 2013 national reform programme and stability

programme for Germany, http://ec.europa.eu/europe2020. 120 www.monopolkommission.de.

monitoring of competition and pricing in the fuel,

gas and electricity sector.121


Overall, Germany has an efficient and transparent

public administration122 and the perceived quality

of public services is ranked above the EU average.

Nevertheless, there is still scope for further

improvement in certain areas.

In general, enterprises benefit from relatively short

payment times by public authorities.123 Also public

procurement processes seem to be well-organised

and transparent, although they often remain

complex and the value of the contracts published

under EU procurement legislation is below the EU

average.124

Although the online availability of both information

and basic public services seems satisfactory, small

enterprises still use e-government services less

often than their counterparts in some other Member

States.125 While the time required and costs for

starting a business and for obtaining the necessary

licences are broadly in line with the EU average,

there may still be room for further simplification.

Moreover, the single points of contact differ across

Länder in terms of procedures and information

provided, indicating possible scope for further

improvement.


German businesses mainly rely on bank loans. At

the moment, access to bank finance is good and,

given the current level of interest rates, firms

(including SMEs) benefit from very favourable

financing conditions.126 While the availability of

risk capital is broadly in line with the EU average,

121 www.bundeskartellamt.de. 122 European Commission, Excellence in public

administration for competitiveness in EU Member States, http://ec.europa.eu/enterprise/policies/industrial-competitiveness/monitoring-member-states.

123 European Payment Index, Intrum Justitia. 124 European Commission, Cost and effectiveness of public

procurement in Europe, http://ec.europa.eu/internal_market.

125 Survey on ICT use, 2012, Eurostat. 126 European Central Bank (2013), Bank lending survey and

Survey on the access to finance of SMEs in the euro area.

http://www.normenkontrollrat.bund.de/Webs/NKR/DE/Homepage/home.html

http://www.bundesregierung.de/Content/DE/_Anlagen/Buerokratieabbau/2011-12-14-eckpunktepapier.pdf?__blob=publicationFile


http://www.monopolkommission.de/index.html

http://www.bundeskartellamt.de/

http://ec.europa.eu/enterprise/policies/industrial-competitiveness/monitoring-member-states/improving-public-administration/

http://ec.europa.eu/enterprise/policies/industrial-competitiveness/monitoring-member-states/improving-public-administration/

http://ec.europa.eu/internal_market


129

there is potential to do better in this respect.127 Risk

capital is particularly important for fast-growing,

innovative start-ups in the ICT and other high-tech

sectors.128 Publicly funded programmes provide

new firms with a range of financing instruments to

start and develop their business, and a number of

additional measures were introduced in 2012 and

2013.129 It remains to be seen if these additional

measures can further stimulate the relatively under-

developed risk capital market. While changes in the

regulatory framework may further contribute to

promoting private investment, market

characteristics and cultural aspects also seem to be

important factors.

The Germany Trade and Investment Agency130

provides international investors with a wide range

of information and support services. Of all FDI

stocks, 76 % originate from within the EU. North

America accounts for about 10 %, while Asia holds

a 5 % share. Investments from outside the EU,

especially Asian countries, continue to grow.

4.5.6 Conclusions

Overall, Germany ranks among the top performers

in many of the competitiveness indicators of the

Industrial Performance Scoreboard and the

manufacturing sector remains one of the key drivers

of value added and employment. Firms benefit

greatly from a favourable and stable business

environment, a strong competitive position, and the

global reach of Germany’s external trade. While the

regulatory environment is generally good, there is

room for improvement and SMEs in particular

would benefit from further simplification.

127 European Commission, SME Access to Finance Index,

http://ec.europa.eu/enterprise/policies/finance. 128 Studie über schnell wachsende Jungunternehmen

(Gazellen), February 2012, Federal Ministry of Economics and Technology, http://www.existenzgruender.de.

129 The most important existing programmes which provide financing for start-up companies include the High-Tech Gründerfonds, the ERP Startfonds and the various programmes under the EXIST initiative.

In 2012 the European Angels Fund Germany was launched in cooperation with the European Investment Bank. Since March 2013, the WI� programme by KFW Bank can provide additional later stage financing of up to EUR 5 million per company. Finally, since May 2013, the new programme Investitionszuschuss Wagniskapital has been able to provide private investors — particularly business angels — with financial incentives of up to 20 % of their investments in young and innovative companies.

130 Germany Trade and Invest, http://www.gtai.de.

Despite the currently favourable conditions,

industry faces important challenges in securing its

competitiveness in the medium and long term. In

particular, demographic challenges may act as a

brake on growth and innovation in the future.

Moreover, the declining number of entrepreneurs

could have an increasingly negative impact over

time. At the global level, Germany is in danger of

losing ground as emerging markets are catching up

in its traditional areas of competence. In order to

remain at the technological frontier and to secure its

competitive position in the future, continued

investments in education, R&D and innovation are

essential.

The new energy strategy is creating growth

opportunities for many sectors, but also presenting

considerable challenges in terms of energy costs,

and timely deployment of the required

infrastructure.

http://ec.europa.eu/enterprise/policies/finance/data/enterprise-finance-index/sme-access-to-finance-index/index_en.htm

http://www.existenzgruender.de/publikationen/studien/08402/index.php

http://www.foerderdatenbank.de/Foerder-DB/Navigation/Foerderrecherche/inhaltsverzeichnis.html?get=083d3e4c07b4e30f88c75bfd42bca232;views;document&doc=9241



http://www.exist.de/

http://www.eif.org/what_we_do/equity/eaf/Germany.htm



http://www.gtai.de/GTAI/Navigation/DE/Invest/Standort-deutschland/FDI/zahlen-daten-fakten.html?view=renderPrint

Country chapter: Estonia

130

4.6. Estonia

-3 -2 -1 0 1 2 3





























Estonia

2007

latest available


Innovative industr

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Susta

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usin

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Fin

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Export

perf

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Public

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3.6N.A. (2007)

3.6


131

Figure 4.6: Manufacturing sectors – Estonia (2010)

Source: Eurostat

4.6.1 Introduction

Estonia is a small and open economy specialising in

export-driven manufacturing, such as electronics,

machinery and wood products. Manufacturing

represented 16 % of gross value added in 2012,

slightly more than the EU average of 15.3 %.

According to national data, which is more recent

than the harmonised Eurostat data presented in the

graph above, the higher value-added sectors are

increasing their share of total manufacturing output.

This confirms Estonia’s long-term trend towards

convergence with its Nordic neighbours. While the

gap with other Nordic countries may not close

completely in the near future, the trend appears to

be consistent, and is confirmed by the improvement

in labour productivity per person employed. This

went up substantially between 2001 and 2011, from

about half to two thirds of the EU average

according to Eurostat, and with a shift towards

higher value-added activities.


Innovation

In the 2013 Innovation Union Scoreboard131

Estonia scores slightly below the EU average, but is

improving at a much faster pace than any of its EU

peers. In particular, expenditure on research and

development (R&D) has increased considerably132

(from around 1 % in 2005 to 2.4 % in 2011), with

total private investment doubling between 2010 and

2011. Much of this increase is due to large scale

investments by the oil-shale related industry in the

development of technology for extracting fuel and

lubricants from oil-shale. These investments are not

only targeted at the exploitation of Estonian

reserves, but also aim to export the technology to

countries that are geologically similar, like Canada

and Jordan. R&D expenditure would have

increased by 20 % even without this project, and the

dynamism of this field can be seen in the high

number of innovative SMEs and the improving

quality of academic research.

The goal of the country’s research, development

and innovation strategy 2007-13 was to move

131 http://ec.europa.eu/enterprise/policies/innovation/files/ius-

2013_en.pdf . 132 Source: Statistical Office of Estonia.

http://ec.europa.eu/enterprise/policies/innovation/files/ius-2013_en.pdf



132

upwards in the international value chain. Recent

data has rewarded this decision: highly skilled, high

value-added industries have weathered the crisis

better and have recovered faster. Furthermore, as

the labour pool is set to shrink in the future, a shift

from labour-intensive to innovative and capital-

intensive sectors will be necessary. Estonia is

unlikely to be able to compete on the basis of

labour costs in the long term.

Support programmes for innovative enterprises are

continuing, although with a more targeted

approach. In 2014-20 the government will focus on

market segments that appear more promising (smart

specialisation), and on key companies (based on

their importance to the economy and their growth

potential). The segments identified are ICT as a key

enabling technology, i.e. with the potential to

support other sectors; health and medical

technologies; and the efficient use of resources. The

latter category includes healthy food, smart

housing, materials science, shale oil and chemistry.

Targeted support makes it easier to access finance

but also to tap into skills and knowledge, such as

through strategic partners. The strategy is mostly

being implemented by Enterprise Estonia, which

will gradually move from being a simple grant

provider to playing a more strategic and active role.

Rather than just financing a project, it will help to

shape it in a way that increases its chances of

success. The Estonian development fund will

monitor the smart specialisation process; the

strategy could be further enhanced by stronger

inter-ministerial cooperation.

Skills

One of the priorities for the economy is to reduce

the skills mismatch,133 as these lead to the

coexistence of unemployment and unfilled

positions. Also the longer-term demographic

challenges require adaptations. Areas where skills

are lacking include the high-tech sectors,

management, and specialised crafts. To improve the

situation, Estonia has modernised its vocational

education and training134, and has undertaken other

133 The parliament is discussing a VET Institutions Act and

the government is studying a Life-Long Learning Strategy for 2014-20.

134 The VET Institutions Act to be adopted and implemented by September 2013.

initiatives, for example on ICT skills.135 Lifelong

learning capacity has been strengthened but there is

room for further improvements.136 A task force was

set up in 2012 to investigate the situation, draw up

forecasts of future demand for skills, target the right

sectors and groups, and provide the necessary

support and financing. The government will

provide a quantitative forecast of demand for skills,

and the Estonian Qualifications Authority will map

the occupational fields and develop the required

qualification standards. The first steps are a register

of competencies in the state register of occupational

qualifications, and a link between online registers,

with full implementation of the scheme foreseen for

2014-15.

One of the main bottlenecks in the economy is a

dearth of trained managers who have experience in

customer management and can call on a network of

contacts. The current initiatives to increase the

supply of qualified technical personnel, such as

scholarships for students in the technical fields

where the demand is greatest, are unlikely to solve

this problem. Estonian companies have indicated

that it is easier for them to produce interesting

technology than to find a market for it, or to find

the managerial skills needed to grow and

internationalise a business. Training providers and

the government are aware of the issue, and are

trying to remedy it. However, this is a long-term

project; in the short term, many companies are

forced to bring in expertise from abroad. This

solution might lead to companies leaving the

country, as foreign managers can be less committed

to Estonia, but can still have positive effects: for

example, Skype kept development in Estonia

despite the headquarters being moved elsewhere.

Procedures for hiring foreign workers in sectors

with high demand have been streamlined. Foreign

workers are able to enter and work in Estonia

before the paperwork has been completed, instead

of waiting abroad.

135 Updating the ICT skills of students and teachers; “Õppiv

Tiiger” - The Learning Tiger Programme 2008-13 in general as well as vocational education and the “Tiigriülikool” Tiger Programme 2009-12 in higher education.

136 Adult participation in lifelong learning has increased from 6.5 % in 2006 to 12.9 % in 2012. But it remains much lower for the 50+ age group and the population of Russian origin. A new national LLL Strategy for 2014-20 is under discussion.


133

Sustainability

As regards the sustainability of its industrial policy,

Estonia lags behind the EU average in terms of the

energy intensity of GDP. This is largely due to the

oil shale industry, which accounts for a high

proportion of the energy mix. In addition, the

district heating system uses energy inefficiently.

The government is developing plans to reduce

energy consumption and to let efficient users sell

the resulting CO2 permits, as successfully done with

the creation of an electric car pool (500 cars) for

social workers, a project including also purchase

grants for private persons and a quick charging

network to cover the whole country. The related

CO2 permits have been sold, and the project had

also a spin-off effect, as Mitsubishi established a

research project on electric car batteries and their

performance in cold climates. The most advanced

new project is for upgrading street lighting.

Given the low energy efficiency of residential

buildings and businesses, there is potential for

economically sound environmental policies.

However these need to be supported with the

necessary technical skills. To achieve this, a

certification system for energy auditors is planned.

This should improve the technical expertise through

government-approved training schemes. However,

there are financial constraints to be overcome.

SMEs tend to have a short time horizon and limited

funds, and therefore might not be interested in

investing in energy efficiency even when their

payback time is relatively short. Therefore,

KredEx137 will provide loans to support such

investment.

Road transportation has very low energy efficiency,

but for now there is no political will to introduce

vehicle taxation to foster the use of smaller and/or

more energy-efficient cars or to favour energy-

efficient alternatives, as this would be unpopular

among Estonians. Noticeable progress has been

made with upgrades to the public transport fleet

under the national environmentally-friendly

investment programme for 2007-14. The passenger

train fleet will gradually be replaced, with the first

units already operating. The Tallinn tramway and

bus infrastructure is being renovated, with new

trams and buses purchased. Many buses operating

137 The Estonian SME finance institution.

elsewhere under public service contracts have been

replaced.

The green innovation programme will help to create

and distribute green products and services, with a

strong focus on ICT. The programme is supported

by a EUR 6 million grant from Innovation Norway,

and is managed by Energy Estonia. However,

effectiveness of these measures is hindered by the

fact that share of trips made by public transport

continues to drop in Estonia.


Estonian exports have one of the highest shares of

GDP in the EU and how exports perform is

correspondingly important. The recovery that

followed the 2009 recession was mainly driven by

exports as domestic demand remained weak.

Recently manufacturing production has continued

to increase relatively strongly, growing 2.7 %138 in

April 2013 year-on-year, but it has been partly

driven by a surge in domestic demand.

Consequently, the current account balance has

deteriorated, moving from 3.2 % of GDP in 2010 to

-3.1 % of GDP in 2012, and is expected139 to stay

negative in 2013 and 2014 as well.

The policy of moving up the value added chain

seems to have brought results. In 2012,140 the

proportion of medium- to high-tech exports

increased substantially, with electronics and

electrical equipment representing 33.4 % of the

total. Some of these exports reflect sub-contracting

by multinationals and are not a sign of local

technology development, but still add value. As

international firms move more sophisticated

functions to Estonia, goods produced by or for them

will add more and more value.

Exporters are supported by two main agencies,

KredEx and Enterprise Estonia, with the first

focusing on credit insurance and the other on

finance. Enterprise Estonia also offers information

138 Source: Eurostat data reported in the Euro area monthly

note on industrial production available at http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12062013-AP/EN/4-12062013-AP-EN.PDF.

139 EU spring forecast, as well as Eurostat data, both available at http://ec.europa.eu/economy_finance/eu/forecasts/2013_spring_forecast_en.htm

140 Source: Statistical Office of Estonia.

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12062013-AP/EN/4-12062013-AP-EN.PDF

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12062013-AP/EN/4-12062013-AP-EN.PDF

http://ec.europa.eu/economy_finance/eu/forecasts/2013_spring_forecast_en.htm

http://ec.europa.eu/economy_finance/eu/forecasts/2013_spring_forecast_en.htm


134

and skills development services, including specific

services for selected target markets. The penetration

of the support measures appears to be excellent.

According to government estimates, companies

accounting in total for 50 % of exports are clients of

Enterprise Estonia, while KredEx clients account

for more than 5 % of private sector employment.


administration

The regulatory environment is cost-effective and

business-friendly, and scores particularly well on e-

government as the availability and use of e-

government tools are exceptionally high. Electronic

filing is used by almost all taxpayers (97 %), and all

procedures can be completed without visiting the

tax authority’s offices. The authority reports that

there were substantially fewer such visits last year,

dropping from about 300 000 to 200 000. A EUR 25

million project to improve public services was

launched with support from the European Social

Fund. Since standard software for e-procurement

was introduced, its use has increased significantly,

from 5 % in 2011 to 25 % now and an estimated

50 % by the end of 2013. Some 7 % of all invoices

are electronic, but a common standard still has to be

developed.

The government is also looking to improve its

insolvency procedure, one of the few areas141 where

Estonia lags behind its EU peers. The goal is to

facilitate an agreed debt restructuring, to find

alternative ways of dealing with insolvencies (i.e.

through out of court resolution), while raising the

competence of judges that deal with such cases.

Rationalising the municipalities, which are often

small and lack the resources to provide certain

services, could increase the efficiency of public

administration. Moreover, the financing system of

municipalities does not currently include incentives

for local governments to support entrepreneurship

and job creation. However, as such a reform would

be politically challenging, the goal is instead to

coordinate their activities and pool resources to

achieve many of the benefits of rationalisation with

141 See http://ec.europa.eu/enterprise/policies/industrial-

competitiveness/monitoring-member-states/improving-public-administration/index_en.htm .

less opposition. At the same time, incentives are

being set for their merger on a voluntary basis.

The administrative burden on businesses appears to

be reasonable; in December 2012 a methodology to

assess the impact of legislative acts has been

adopted, which should increase their quality and

transparency. There is an electronic system for

consulting on new laws and regulations, but some

stakeholders report that the minimum time of two

weeks is insufficient, and is sometimes not

respected. Further, a more robust assessment of the

costs and benefits of new regulations could be

useful, as in some case the costs imposed on

businesses may be disproportionate. This could be

the case for the increase in the amount of

information collected on sales, which is a measure

to enhance VAT collection and fight the black

market. This requirement has resulted in an

additional burden on 75 000 payers, but has only

resulted in EUR 25 to 30 million more being

collected.

In some cases the government’s preference for a

small number of simple rules may have negative

consequences. In particular, social charges on

labour cannot be lower than a minimum

contribution based on the minimum wage, with no

exceptions for part-time workers. At the same time

the government also needs to be alert to VAT fraud,

as it estimates that 22 % of the 18 000 new

companies founded in 2012 were involved in such

activities. The government is working on extending

a warranty system that has been successful in

reducing fraudulent claims in the fuel sector.


Access to finance has shown signs of improvement,

but remains a priority for Estonian firms. Since the

onset of the crisis, access to sources of financing

such as the stock and bond markets has been

limited. Some large firms, especially utilities that

enjoy steady cash flows, have continued to access

bond markets, but this has not been possible for

SMEs. Many larger firms have been forced to tap

foreign markets, mainly London.

The government is considering the possibility of

supporting a local stock and bond market, but this

would be a medium to long-term project. For

SMEs, there is little alternative to bank lending.

http://ec.europa.eu/enterprise/policies/industrial-competitiveness/monitoring-member-states/improving-public-administration/index_en.htm




135

The banking sector is doing well with rising

numbers of clients, deposits, foreign transactions,

leasing contracts and card usage. The growth of

their loan portfolios that started in 2012 continued

at a moderate speed in early 2013 with the

corporate loan portfolio increasing by 5 %142.The

composition of the loan portfolios is also changing,

with little lending going to real estate. This suggests

that firms in other sectors are getting better access

to loans, although the loan approval criteria

continue to be strict.

Entrepreneurs often use their own assets as

collateral to get loan approval. The growth of

leasing can be an indication of a preference for

collateralised loans. Such risk aversion can lead to

constrained credit and lower growth. On the other

hand, it also guards against excessive leverage.

Firms have adjusted to the situation by becoming

more efficient, reducing their need for capital, and

limiting their exposure to external financing. This

makes them more resilient, but also curbs their

ability to grow.

KredEx, Enterprise Estonia and the Estonian

development fund are the government’s tools to

support firms. The development fund is being

reformed and made more project-based. Two new

organisations were established in 2012 to facilitate

access to seed and equity capital. EstBAN is a

network of angel (early stage) investors with 25

members, offering investment in sizes from EUR

20 000 to 500 000. These investors expect to invest

in 10-15 firms to a total of EUR 1 million in 2013.

Although the amounts are low, the effect of such

‘smart money’ investment should be more than

proportional to their size, since recipients will

benefit from the experience of the investor, and the

funds will be channelled to firms with rapid growth

potential.

Another new institution is the Baltic Innovation

Fund, a EUR 100 million fund of funds which will

invest in private equity and venture capital funds in

the Baltic countries. The EIF is investing EUR 40

million, along with EUR 20 million each from the

different national promotional agencies. Foreign

142 Financial Stability Review 1/2013, Bank of Estonia.

Available at http://www.eestipank.ee/en/publication/financial-stability-review/2013/financial-stability-review-12013.

direct investment focuses on five priority sectors143

(metals/machinery, electronics, ICT, shared

services and logistics), and grew from 27

investments in 2011 to 35 in 2012.

4.6.6 Conclusions

Estonia has recovered quickly from the crisis of

2008-09. Although the growth rate has slowed

somewhat, the country is still outperforming the EU

average. It is also improving its position in the

international value chain, moving towards more

innovative and knowledge-intensive sectors and

benefiting from growing investment in research and

development.

However, efforts will be needed to keep this

positive trend going. Particular efforts need to be

made to address the high energy intensity of the

economy, and the shortage of skills necessary for

further growth. Although there have been signs of

improvement, many companies, especially new

ones, find it difficult to get access to finance. The

good business environment is to be admired, and is

being further improved.

143 Data from the Estonian Investment and Trade Agency (a

branch of Enterprise Estonia).

http://www.eestipank.ee/en/publication/financial-stability-review/2013/financial-stability-review-12013

http://www.eestipank.ee/en/publication/financial-stability-review/2013/financial-stability-review-12013

Country chapter: Ireland

136

4.7. Ireland

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Ireland

2007

latest available


Innovative industr

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Susta

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industr

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usin

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Export

perf

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adm

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3.6

N.A.; N.A. (2007)

N.A.; N.A. (2007)

N.A.; N.A. (2007)

N.A.


137

Figure 4.7: Manufacturing sectors – Ireland (2010)

�ote : No data available for sectors C12 (tobacco products), C19 (coke and refined petroleum products), C30 (manufacture of other transport

equipment) and C31 (furniture)

Source: Eurostat

4.7.1 Introduction

Ireland has done relatively well in carrying out the necessary reforms as prescribed under the financial assistance programme. The main focus of the programme has been to restore financial market confidence by reducing the government deficit and shrinking the banking sector, while reforming the economy at the same time. Real GDP growth figures show that Ireland is rebounding from the crisis with 2.2 % growth in 2011 and 0.2 % for 2012.144 Ireland’s efforts at economic reform would suggest that it may be ready to exit the programme at the end of 2013, as was originally foreseen.

The Irish economy is principally based on SMEs, which account for 99.7 % of companies. Microenterprises account for the bulk of these, representing 89 % of enterprises. However, while only roughly 0.3 % of companies are large enterprises, they account for approximately 31 % of employment and 48.5 % of Ireland’s value added.145 Ireland has a large foreign multinational sector with comparative advantages in sectors such as pharmaceuticals and chemicals. In fact, this sector accounted for 51.8 % of manufacturing in Ireland in 144 Revised national Accounts data; European Commission

Spring 2013 Economic Forecasts. 145 Ireland SBA Fact Sheet 2012:

http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/countries-sheets/2012/ireland_en.pdf.

2009. The other main sectors were the food, beverages and tobacco sector, at 17.4 %, and the electronics, electrics and machinery sector, registering 13.7 % of the total. The services sector is also becoming increasingly important, in particular high-technology and knowledge-intensive services.

The Irish economy ranks second highest with respect to labour productivity per person employed and ranks first with respect to labour productivity per person employed in the manufacturing sector. However, this data should be treated with caution, given the effect of the large number of foreign multinationals and their use of adapted transfer pricing.


Innovation

According to the 2013 Innovation Union Scoreboard,146 Ireland is an innovation follower with an above average performance.

The ‘Strategy for Science, Technology and Innovation 2006-13’ has been the main tool used for achieving the goal of making Ireland a leading

146 http://ec.europa.eu/enterprise/policies/innovation/facts-

figures-analysis/innovation-scoreboard/index_en.htm.

http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/countries-sheets/2012/ireland_en.pdf






138

knowledge economy. In 2012, the government adopted the report of the Research Prioritisation Steering Group. The group identified 14 priority areas, along with six underpinning platform technologies and infrastructures that will become the focus of the majority of competitive funding in research for the next five years.

Ireland has an R&D target of 2 % of GDP by 2020. This stood at 1.72 % in 2011 with business R&D accounting for 1.17 % of the total. R&D investment by firms does not appear to have been seriously affected by the crisis, to the extent that business R&D investment in real terms continued to increase until 2010 and remained constant in 2011. The provisional estimate of gross domestic expenditure on R&D (GERD) financed from abroad stood at 19.2 % in 2011.147 This reflects the policy of attracting foreign investment with a large R&D component.148 The key areas of focus are the food sector, agriculture and fisheries, medical technologies, and nano and bio-technologies. Ireland is also strong in ICT compared to the EU and also to the US.

Fiscal measures play an important role. R&D tax credits were established in 2004, providing a 25 % tax credit on incremental expenditure and a 25 % volume-based credit for eligible capital expenditure. This was complemented with an expansion of tax credits in 2010 to enhance investment in intellectual property by excluding royalty income from withholding tax. The 2013 budget stated that credit would be reviewed with the objective of ensuring that tax credit remains ‘best-in-class’ internationally and represents value for money for taxpayers.

An Intellectual Property Protocol (IPP) was published in June 2012 as part of the Action Plan for Jobs 2012. The protocol aims to help industry access R&D done in Irish universities, institutes of technology and other public research institutions. It also aims to commercialise IP generated from such research. Among the measures included in the protocol is a new Central Technology Transfer Office which will be hosted by Enterprise Ireland. It will act as a one-stop shop for businesses seeking to use IP from public-funded research. While this has not yet become fully operational, work has commenced on setting up a portal.

147 Eurostat estimated EU average for 2010 stood at 8.9 % of

GDP. 148 Ireland country report — Research & Innovation

Performance in EU Member States and Associated countries 2013: http://ec.europa.eu/research/innovation-union/pdf/state-of-the-union/2012/innovation_union_progress_at_country_level_2013.pdf.

However, Ireland also has a number of challenges in research and innovation, in particular the relatively low number of patent applications as well as a decline in the number of innovative SMEs.

Skills

One of Ireland’s strengths has always been its well-educated workforce. This is reflected in the fact that it ranks as top among Member States with respect to the percentage of employees in the manufacturing sector with high education attainment levels. Moreover, it currently has the highest tertiary education attainment rate in the EU at 51.1 % (2012), with a target of 60 % for 2020. Ireland is also making progress in the early school leaving target of 8 % by 2020, reaching 9.7 % in 2012.

Nevertheless, increasingly long-term unemployment and high levels of youth unemployment are a source of concern. In an effort to return to growth, the government is seeking to up-skill, re-skill and provide education and training opportunities to the unemployed. With this goal in mind, a series of education and training programmes have been set up, such as Momentum, Springboard and Youthreach. In 2010, there were 2 385 Youthreach participants that achieved certification, of which 15% progressed to employment, while 52% continued to further education and training. The development of new training opportunities, in particular the up-skilling of the work force and of the unemployed as well as re-entry into education, is essential to ensure that long-term-unemployed jobseekers do not become permanently excluded from work.

The National Skills Bulletin 2012 pointed to skills gaps, mainly in science, engineering and IT. A joint government-industry ICT action plan was launched in 2012, including the doubling of ICT graduates by 2018. The ICT graduate skills conversion programme has also been developed to tackle this

shortage. This is particularly important given the importance of the IT sector in Ireland.

Sustainability

Ireland is the best performer in the EU for both energy intensity and CO2 intensity. The reason for this is the importance of services and high value-added manufacturing. The key environmental challenges are inefficient building stock, fossil-fuel-

http://ec.europa.eu/research/innovation-union/pdf/state-of-the-union/2012/innovation_union_progress_at_country_level_2013.pdf





139

based electricity generation and a culture of car dependency.149

As part of the Action Pan for Jobs 2012, the government published the policy document ‘Delivering Our Green Potential’ aimed at developing the green economy. According to this report, 18 750 people were employed in six key sub-sectors of the green economy in 2010150 and the value of sales of low-carbon environmental goods and services was estimated at approximately 4 % of GDP in 2010-11.

The report mentions firms that have developed innovative clean-tech products in areas such as insulation materials, efficient heating equipment, energy management systems and energy-efficient lighting. As envisaged under the policy, a consultative committee involving the ministry and key stakeholders has been established. The committee meets on a quarterly basis to examine key thematic areas of the green economy with a view to identifying opportunities and activities to address barriers and help enterprises take advantage of opportunities. The identified actions may be included in the Action Plan for Jobs in subsequent years.

There are a number bottlenecks preventing business from improving the uptake of cleaner technology, mainly related to access to finance. For smaller companies, another factor is a lack of awareness of low-cost solutions. In an effort to address this problem, a number of specific programmes are being offered to businesses, as is mentoring.151

In March 2013, the government also announced that it was setting up a new energy-efficiency fund, worth EUR 70 million (EUR 35 million to be made available by the government with the rest coming from the private sector), as part of the second National Energy Efficiency Action Plan. The fund provides finance to energy-efficiency projects across all sectors of the economy. It is envisaged that lending will start in 2013.

149 Eco-innovation Report on Ireland 2011: http://www.eco-

innovation.eu/index.php?option=com_content&view=article&id=474&Itemid=62.

150 Taken from the Expert Group on Future Skills Needs (EGFSN) the sub-sectors being renewable energies; efficient energy use and management; water and waste water treatment; waste management, recovery and recycling; environmental consultancy services; and Green ICT applications/software.

151 Such as www.cleanerproduction.ie; www.begreen.ie; www.seai.ie/Your_Business.


Exports account for over 100 % of GDP and Ireland has the largest share of exports as a percentage of GDP, given the significant number of international companies. While the recession has had an extremely negative effect on the economy, it has recovered in part due to the strength of exports by firms in the high-tech sectors. These firms are mainly affiliates of multinational enterprises.

Data for 2012 shows that the current-account surplus surged to 4.9 % of GDP in 2012, reflecting not only a contraction in domestic demand, but also competitiveness gains achieved through increased productivity, inflation below the euro-area average, and cost-cutting measures, including on wages. Persistent weakness in trading-partner demand is nevertheless affecting demand for merchandise exports, which contracted on a quarterly basis in the last two quarters of 2012, as a result of the anticipated expiry of pharmaceutical patents. However, the rise in services exports, which have expanded by around 10 % in annual terms every quarter since the second half of 2010, has however substituted for weak goods export developments.152 In fact, 2012 was a notable year in that it was the first year that the value of exports of services exceeded that of goods, and that services exports exceeded services imports.

The Action Plan for Jobs plays a role by helping indigenous companies to export. In 2012, a new potential exporters division within Enterprise Ireland started to provide assistance and guide clients in their international export strategies. A new microenterprise and small business division has also been established within Enterprise Ireland. As of 2013, local enterprise offices will be established to provide support to small and microenterprises on behalf of Enterprise Ireland.

4.7.4 Business environment and public administration

Business Environment

Ireland remains one of the most attractive places to do business in Europe, ranking fifth in the EU and fifteenth globally.153 Its strengths include protecting investors, paying taxes and resolving insolvencies. It scores relatively low in dealing with construction permits and obtaining electricity. It is also ranked as the easiest place to start a business in the EU and

152 European Commission Spring 2013 Economic Forecasts. 153 World Bank Doing Business Report 2013.

http://www.eco-innovation.eu/index.php?option=com_content&view=article&id=474&Itemid=62



http://www.cleanerproduction.ie/

http://www.begreen.ie/

http://www.seai.ie/Your_Business


140

it achieves two of the three main goals of the May 2011 Competitiveness Council recommendations, as it takes approximately two to five days to open a business at a cost of EUR 50.154

The Action Plan for Jobs contained 270 individual actions for 2012, with over 90 % of these being completed. The plan covered a series of small measures aiming to improve the research, innovation and skills base; measures to help SMEs to enter new markets and access finance; attracting entrepreneurs from the diaspora to Ireland; and focusing on some of the most promising sectors.

A new Action Plan for Jobs 2013 has been launched, building upon previous initiatives, but including 333 actions. The new plan is more ambitious, including projects that require cross-government collaboration. Nonetheless, there are still issues of concern for local businesses, in particular for SMEs. While cost competitiveness has improved over recent years, small businesses still face relatively high electricity prices. In fact, Ireland has one of the highest costs of electricity in the EU, because it depends on imported fuel and has under-invested in distribution networks.

Services have become increasingly important in recent years. These mainly consist of high-technology services, such as computer services, and knowledge-intensive services, such as financial services, insurance and other business services. In fact, it has been estimated that while the services sector accounted for 21 % of all exports in 2000, for the third quarter of 2012, services accounted for 50 % of total exports.155

Legal services remain expensive,156 and the high price is hampering cost and external competitiveness. The Legal Services Regulation Bill, which is a programme requirement, addresses many of these issues, in particular by establishing a new Legal Services Regulatory Authority. The bill is expected to be enacted by the end of 2013.

Public Administration

While tax compliance burden is among the lowest in the EU, SMEs see VAT compliance as a major burden. In the 2013 budget, the government

154 The conclusions of the Competitiveness Council of 31

May 2011 are namely to create a one-stop-shop for starting up a business, and a call to Member States to reduce the start-up time for new enterprises to 3 days and EUR 100 by 2012. DG Enterprise and Industry data.

155 Irish Central Bank Report, Quarter 1 2013. 156 The World Bank Doing Business 2013 report estimates

that as a percentage of the value of a standardised claim in a commercial dispute, the enforcement cost is 26.9 % in Ireland, as opposed to an OECD average of 20.1 %.

increased the VAT cash receipts basis accounting threshold from a turnover of EUR 1 million to EUR 1.25 million to help companies with cash flow. However, many businesses felt that doubling the threshold to EUR 2 million would have been more useful. The government has also launched a consultation concerning taxation of microenterprises in an effort to identify ways of easing the administrative burden of tax compliance.

The government is pursuing a public-service reform plan which aims to maximise new and innovative service delivery channels. This includes the e-government strategy 2012-15, which is the main policy tool for pushing e-government so as to reduce the administrative burden on businesses and consumers. In all, 91 % of enterprises currently use e-government services (2012).

As regards the administrative burden and the goal of achieving a 25 % reduction by 2012, a reduction of approximately 20 % across all ministries has been achieved. The goal is to reach the 25 % target by the end of 2013. This will include creating a business portal where retailers can register once and apply for all licensing requirements. The aim is complete this portal by October 2013.

On the issue of corruption, according to Transparency International, the corruption perception index for 2012, Ireland ranks 25th in the world and 10th in the EU. While this is a relatively good score, since 2009 there has been deterioration in the perception of corruption in Ireland.


One of the major challenges facing SMEs remains access to finance. This is due both to generally weak demand for credit in a deleveraging environment and to supply side constraints. A recent report157 noted that access to finance was the third largest problem facing SMEs, after finding customers and competition.158 Loan rejection rates are among the highest in the EU159 and the general perception among SMEs is that banks are not lending.160 This may be due to the fact that many of those who are refused credit do not agree with the reasons for the refusal, or are not given any reasons. Moreover, long time lags for processing can add to firms’ difficulties.

157 By the Economic and Social Research Institute (ESRI). 158 ‘SME Credit Constraints and Macroeconomic Effects’,

Gerlach-Kristin, O’Connell & O’Toole, ESRI, April 2013. 159 Access to Finance Report, ECB April 2012. 160 Irish Department of Finance Report on SME Credit

Demand Survey September 2012.


141

Improving access to finance is one of the key objectives of the Action Plan for Jobs 2013 with a number of initiatives being undertaken. The objectives are governed by a cross-departmental steering group, known as the SME State Bodies Group, which oversees the activities related to SME bank and non-bank access to finance.

Another government initiative was the establishment of the Credit Review Office (CRO) in 2010. It is designed to resolve disputes between banks and their SME clients about loan refusal, with a power to overturn loan decisions. Leading banks have been set lending targets of EUR 4 billion each in 2013. Banks are required to process loan applications within 15 days, although the average time is 29 days.161 Banks also need to enhance their capacity to assess SMEs creditworthiness based on cash flow rather than property collateral.

SMEs are used to working with bank overdrafts and tend to renew or restructure bank overdraft facilities. There are also skills gaps, in particular among microenterprises, when it comes to presenting the necessary business plans required by banks. While banks have prepared a joint guidance plan to help businesses in this regard, further assistance by government may be warranted. A one-stop website162 for Irish business has been useful and is jointly supported by banks, businesses and government.

Ireland has an active seed and venture capital market and the Seed and Venture Capital Programme 2013-18 will provide up to EUR 175 million in funding. The majority of these funds will be invested in high-growth innovative firms in fast-growing sectors such as ICT, life sciences, high-tech manufacturing and the green economy. The government is aiming for an additional EUR 525 million in funding from the private sector, which will mean a total of EUR 700 million for investment throughout the lifetime of the programme.

In 2012, a credit guarantee scheme and a microfinance scheme were launched. The former will facilitate access to up to EUR 150 million in additional lending. The latter will provide for an additional EUR 90 million in lending. However, the take-up of these schemes is relatively low. Innovation Fund Ireland has been created to increase the availability of capital for early-stage and high-growth companies. Moreover, the National Pensions Reserve Fund has undertaken to

161 Irish Department of Finance Report on SME Credit

Demand Survey September 2012. 162 www.smallbusinessfinance.ie.

put funds in place to help meet SME financing needs.163

Foreign direct investment was provisionally estimated at EUR 22.8 billion in 2012, a significant increase in relation to the 2011 level of EUR 8.2 billion. This is a significant improvement following a decline in inflows between 2010 and 2011. It was also estimated that inflows for 2012 accounted for 14.3 % of Irish GDP.164

4.7.6 Conclusions

Ireland is slowly returning to growth, which is also becoming more broad-based. The economic adjustment programme has been implemented consistently, which has had a positive impact, including restored competitiveness.

However, some key challenges remain. The fight against high unemployment, in particular youth and long-term unemployment, is a priority for the government and the ‘Action Plan for Jobs’ has been at the heart of efforts to foster job creation.

The skills mismatches resulting from structural changes in the economy over the past years also present a significant challenge. Thus, ongoing reforms to provide appropriate further education and training are crucial. Access to finance, in particular for SMEs, is yet another challenge. Although cleaning the banking system has been going on for quite a while, it has not yet reached its conclusion, and further deleveraging of the whole economy would help to establish the credit flows again restore the health of domestic banks, thereby restoring normal lending channels to the economy.

163 Namely, the SME Equity Fund, the SME Turnaround

Fund and the SME Credit Fund. 164 http://www.oecd.org/daf/inv/FDIinfigures.pdf.

http://www.smallbusinessfinance.ie/

http://www.oecd.org/daf/inv/FDIinfigures.pdf

Country chapter: Greece

142

4.8. Greece

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143

Figure 4.8: Manufacturing sectors – Greece (2009)

Source: Eurostat

4.8.1 Introduction

The Second Economic Adjustment Programme for

Greece was approved in March 2012, financed by

the European Financial Stability Facility (EFSF).

The programme foresees financial assistance of

EUR 164.5 billion by the end of 2014.

The economy saw a drastic decline in

competitiveness following an increase in labour

costs of more than 50 % in 1999–2009. In 2012,

GDP decreased by 6.4 %, and the forecast for 2013

is a decrease of over 4 %. However,

competitiveness is currently being restored through

increased wage flexibility and low inflation.

According to the figures from the Hellenic

Statistical Authority, labour costs have been

reduced by 20 % over the past three years.

The services are the biggest sector in the Greek

economy, and tourism is a major part of that in

terms of both importance to the economy and

employment. Manufacturing contributes close to

10 % of the total value added (the EU average is

just over 15 %). Greece specialises in food

processing (manufacture of vegetable oils;

processing and preserving of fruit and vegetables).

Other important sectors are metals, chemicals,

cement and textiles.


Innovation

There are challenges ahead for the innovation

system, as the country needs to transform itself into

a stable environment for entrepreneurship and

create conditions for growth. According to the

Innovation Union Scoreboard 2013, Greece is one

of the moderate innovators, with a below-average

performance. Innovation performance declined at

an average annual rate of 1.7 % between 2008 and

2012.165

In the past decade R&D expenditure has stagnated,

at 0.58 % of GDP.166 In 2011 Greece set an R&D

intensity target of 2 %, to be achieved by 2020, but

the National Reform Programme for 2013 revised

this target downwards to 0.67 % of GDP, which is

considered as more consistent with current trends

and with the economic outlook.

The objective of Greece’s innovation strategy is to

promote innovation in all sectors as a key driver for

restructuring the Greek economy and for the

transition to a knowledge-based economy. EU

programmes play a major role in the funding of

165 Innovation Union Scoreboard 2013, p. 6. 166 Eurostat.


144

innovation initiatives, but the level of funding

available exceeds the amount that the business

sector can absorb. Besides the general economic

environment, financial constraints can play a role,

as many eligible companies cannot provide bank

guarantees to receive an advance payment.167 The

commitments to specific innovation policy

initiatives for 2010-12 amounted to

EUR 596 million and are aimed at programmes

supporting technological and knowledge transfer,

cluster cooperation and the creation and growth of

enterprises.168 Despite the progress achieved in

recent years, further efforts would help, in

particular closer links between researchers and

industry, and improved technology transfer.

Although policy is emphasising the use of new

financial instruments, including funds dedicated to

supporting innovation, there are substantial

difficulties as almost no national co-finance and no

private investment is available. Consequently,

subsidies continue to be the main type of support

for R&D, though tax incentives are also used. In an

effort to boost development through R&D, the

government has recently adopted new legislation169

that further enhances tax incentives for enterprises

engaged in R&D.

Skills

Greece faces many challenges to improve its skills

base through improvements in education and

training aiming to better adapt to labour market

needs. This includes in particular teacher training

and the quality and relevance of vocational

education and training as well as lifelong learning.

Reforms in tertiary education are only partially

implemented. Among other issues, these reforms

would include better use of universities to provide

lifelong learning opportunities to local and regional

populations and better monitoring of inputs and

outputs.170

An action plan to support youth employment and

entrepreneurship was adopted by the Greek

government in January 2013. It has been allocated a

budget of EUR 600 million, EUR 517 million of

which is provided through the European Social

167 Innovation Policy trends in Greece, 4/9 2012. 168 Ibid. 169 Law 4110/2013. 170 Assessment of the 2013 national reform programme for

Greece; SWD(2013) 358

Fund and the European Regional Development

Fund. The plan comprises a set of programmes that

should benefit 350 000 young people in the age

group 15 to 35. The objective is to target

employment and entrepreneurship for young people

in the two age groups of 15-24 and 25-35. The plan

stresses apprenticeship, traineeship and the

transition from education to employment.

Active labour market policies seek to facilitate the

transition of workers between sectors; improve the

quality of training, and promote the employment of

vulnerable groups. Further opportunities for

apprenticeships and vocational training are due to

be introduced over the medium term, with stronger

links with employers to increase graduates’ chances

of professional integration.171

Sustainability

Between 2005 and 2010 Greece cut by 10 % the

emission of greenhouse gases that are not part of

the EU emissions trading system. The reduction

seems to be a result mainly of the economic

slowdown. Projections show that Greece will

increase emissions by 3 % by 2020 and will not

achieve its reduction target.

Progress has been made on renewable sources of

energy. Under the renewable energy Directive,172

Greece is required to produce 18 % of its final

energy consumption and 10 % of the transport use

from renewable sources by 2020. In the national

renewable energy action plan Greece committed

itself to 20 % instead of 18 %. In 2011 the share of

renewable energy sources in gross final energy

consumption was 11.5 %. Greece has over recent

years granted generous tariffs in particular for

photovoltaic installations; as a result 97 % of the

capacity has been installed over the past three

years.


Although the economy as a whole remains oriented

towards the domestic market, export performance

continues to improve, albeit from a low base. The

national export strategy has set ambitious goals for

boosting exports of goods to 16 % of GDP by 2015.

171 Assessment of the 2013 national reform programme for

Greece; SWD(2013) 358 172 Directive 2009/28/EC.


145

Greek exports in 2012 were EUR 27.6 billion or

13.8 % of GDP, itself a record.173

The national export strategy seeks to improve the

international competitiveness of Greek companies

through export promotion and export facilitation. It

is based on three pillars:

1. Enlarging the export base by formulating

industry-specific policies to encourage

companies to produce and offer

internationally competitive goods and

services.

2. Trade and promotion of foreign direct

investment by integrating economic

diplomacy efforts, building a national

brand and overall support for companies to

engage in international trade networks and

find trading partners abroad.

3. Trade facilitation. The national trade

facilitation strategy was announced in

November 2012. It features 25 measures

aimed at reducing the time needed for

export by 50 % and costs by 20 % by 2015.

The strategy is focused on simplifying the

cumbersome pre-customs and customs

procedures. Some changes have already

been made to the customs procedures:

a. electronic submission of customs

clearance declaration for exports

(April 2012);

b. mandatory presence of a customs

broker for customs clearance

formalities repealed (December

2012);

c. free access to the customs broker

profession (December 2012);

d. indirect representation for

customs clearance (December

2012).

e. customs operations launched 24/7

or double-shifts for exports in the

pilot offices of Athens airport and

Piraeus Port (June 2013);

f. simplified pre-customs and

customs procedures for kiwi and

feta cheese (June 2013).

173 Greek national export initiative.

In an effort to strengthen entrepreneurship and the

internationalisation of SMEs, a programme was

launched, co-funded by the EU structural funds

under the action ‘Internationalisation and

competitiveness of SMEs’. In total 746 projects

have been selected with a total budget of EUR 143

million.


administration


The difficult economic conditions and continuing

uncertainty have taken a heavy toll on Greek

businesses and the government is grappling with

the challenge of balancing budget cuts with

structural reforms to spur growth, as economic

reforms are fundamental for sustainable growth.

The high level of regulation and bureaucracy, as

well as corruption, have been a constraint on

businesses and hampered entrepreneurship. In

addition, the lack of competition has held back

productivity and competitiveness.

In the context of the Economic Adjustment

Programme, steps are being taken to tackle many of

the structural barriers and regulatory failings that

have traditionally restricted business. Efforts

undertaken in a number of areas are starting to

show results, which were reflected in Greece’s

improved ranking in the World Bank’s ‘Doing

Business’ indicators. Greece was up from 100th

place in 2012 to 78th, which is proof that the efforts

made to improve the business environment are

starting to bear fruit. In particular, there was

progress in reducing the time required to get

construction permits; more transparency for and

protection of investors; and an improved process

for resolving insolvent firms. The government has

also adopted ten measures in the areas of starting a

business, registering property, dealing with

construction permits and protecting investors.

The EU Task Force for Greece provides technical

assistance for a wide range of projects to improve

the business environment. Projects are on-going in

areas like the simplification and streamlining of

licencing and permit systems for investment, trade

facilitation and customs reform, export promotion,

and the screening of administrative burden for


146

business. EU structural funds are seen as key to

boosting the economy; the available funds came to

EUR 20.4 billion for the 2007-13 financing period.

Well-known deficiencies in the business

environment have been addressed over recent years.

Important measures have been taken to ease the

creation of companies and to simplify licence

procedures and investment authorisations. The time

needed to set up a business is now below the EU

average (11 days in Greece against the EU average

of 14). Starting up a company and registering

property remain expensive, and the cost and time

for exports and imports need to be further reduced.

It is still four times more expensive to start a

business in Greece (% of income/capita) than the

EU average, and it is more costly to register

property.174

The full entry into force of the law on simplifying

and accelerating the licencing of manufacturing

activities175 and its implementing acts provide an

integrated institutional framework for the

modernisation and simplification of licencing

procedures, covering technical professions,

manufacturing and business parks. On technical

professions, the right to provide certain services

was expanded, while the total number of licences

was reduced. As regards manufacturing, there has

been a reduction of up to 75 % in the time and cost

needed to obtain an operating licence for low-

nuisance activities.

With support of the OECD, the authorities are

reviewing laws and regulations for harmful effects

on competition in tourism, retail, building materials

and food processing; as well as for administrative

burden on businesses in 13 sectors. The government

has also presented a strategic vision to streamline

and unify investment licenses and strengthen self-

compliance with standards and controls. The

strategy will be implemented in 2013 and 2014.

SMEs have been hit hard by the crisis, and there are

fewer enterprises in 2013 than there were in 2005.

The size distribution of firms deviates from the EU

average, with the number of large enterprises only

half the EU average. Also, SMEs are heavily

weighted towards the small end, with

microenterprises accounting for 96.6 % of all

174 SBA Fact Sheet 2012. 175 Law 3982/2011.

enterprises. In total, SMEs employ 85.2 % of the

labour force in private employment, whereas the

EU average is 67.4 %. This reflects the fact that

Greeks are more likely than the EU average to be

self-employed.176 The SMEs are more oriented

towards trade than elsewhere in the EU, and the

share of SMEs specialising in high-tech

manufacturing or knowledge-intensive services is

only 18 %, whereas the EU average is one-third.

Greece does not always ‘think small first’, as the

authorities perform less well than their EU peers in

terms of communication and simplification of rules

and procedures, and impose a higher burden on

companies. However, steps are being taken,

including simplified provisions on entrepreneurship

and a new private company status with a capital of

one euro, seeking to facilitate the life of SMEs. 177

The General Electronic Business Registry (GEMI)

is being complemented with a self-registration

option for companies. This is a state-owned

electronic database hosted by the chambers of

commerce. Data stored in GEMI include key

personnel, annual accounts, tax identification

number, company status, company number and

relevant court decisions. To date 76 000 companies

have been started through GEMI. The registry is

linked to the one-stop shop for business start-ups

that was launched in 2011.

A new, more flexible, corporate form for private

limited companies (IKE) was adopted in July

2012.178 Judging by the number of firms using this

form, it seems to be a success. The advantage

compared to other limited companies is that IKEs

have a minimum capital requirement of only

EUR 1, whereas for regular limited companies it is

EUR 4 500.

Reforms to the public procurement procedures are

being planned. The aim is to promote sound public

procurement by making the newly created single

Public Procurement Authority fully operational.

The establishment of an e-procurement platform is

expected to lead to less bureaucracy, prevention of

corruption, more transparency and better

participation of economic operators. It should also

reduce the time and cost of procurement.

176 Ibid. 177 SBA Fact Sheet 2012. 178 Law 4072/2012.


147

The contribution of services to GDP was 71.7 % in

2011,179 which makes them the most important

sector of the economy. Tourism alone contributes

18.2 % of GDP180 and over 7 % of total

employment181 (over 18 % if indirectly supported

jobs are counted). The shipping industry is another

important sector for the economy, as Greek firms

have 16.2 % of the world’s shipping capacity

measured in deadweight tonnage.182


Greece’s overall public administration

performance, as measured by the World Bank’s

government effectiveness indicator, is well below

the EU average. The perceived quality of public

services, including quality of the civil service and

policy implementation, is low (a score of 0.52

compared to 1.18 in the EU).183

Public services are also less likely to be available

online.184 E-government use by small enterprises in

2012 was slightly above the EU average (86 % and

85 % respectively) whilst e-government use by

citizens in 2013 was below the EU average (43.8 %

and 52.5 % respectively).185 The duration of

payments by the public authorities is above the EU

average (174 days compared to the EU average of

66 days).186

With the support of the EU Task Force for Greece,

technical assistance is provided for reforming the

public administration. A high-level transformation

steering group under the prime minister has been

set up to supervise the reform of the central

administration.187

The Greek judicial system is inadequate and, in

particular, the length of judicial procedures is long

in all areas, including in civil and commercial

justice. The rate of resolving cases is low, resulting

179 Eurostat. 180 http://www.investingreece.gov.gr/default.asp?pid=

36&sectorID=37&la=1. 181 OECD Tourism trends and policies 2012

http://www.oecd-ilibrary.org. 182 United Nations conference on trade and development,

Review of Maritime Transport 2011, p.41, accessible at http://unctad.org/en/Docs/rmt2011_en.pdf.

183 European Commission (2012),’Excellence in public administration for competitiveness in EU Member States’.

184 SBA Fact sheet Greece 2012. 185 Eurostat. 186 European Payment Index by Intrum Justitia, 2012. 187 Task Force for Greece, Quarterly Report of December

2012.

in increasing delays and a significant case backlog.

ICT systems for the management of cases and for

communications between the courts and parties,

which could help improving the management of

cases, are poorly developed. In addition, the

perceived independence of justice in Greece gets

the fourth worst rating in the EU. 188

In the framework of the Economic Adjustment

Programme, Greece has committed to reforming the

judicial system. These include reviewing the civil

code, introducing an administrative review of cases,

improving the organisation of the magistrates’

courts, developing e-justice applications, bringing

the insolvency legislation and practice in line with

best practice and promoting alternative dispute

resolution mechanisms.


Bank credit to the corporate sector is contracting,

making it increasingly difficult to finance

production and investments. The main factors

contributing to this are the difficulties of the bank

sector, state arrears to suppliers (standing at around

4.4 % of GDP at the end of 2012), the drop in the

market value of collateral assets (real estate), and

the country risk, that makes any financing of large

businesses by foreign banks almost impossible. In

the ECB survey on SME access to finance (March-

September 2012), only 36 % of Greek SMEs said

they had received the loan requested (Eurozone

61 %).

To facilitate the financing of the Greek economy,

the government with the support of the task Force

for Greece has analysed the extent of credit

financing gaps in view of setting up an “Institution

for Growth”.189 The main findings show that:

- There is an equity funding gap and a

structural debt funding gap of the order of

EUR 5-10 billion each;

- The current situation in the banking market

leads to insufficient supply of project

finance, working capital and import/export

financing;

- Greece suffers from a lack of specialised

financing institutions;

188 EU Justice Scoreboard 2013. 189 TFGR Quarterly Report, April 2013.

http://www.investingreece.gov.gr/default.asp?pid=%2036&sectorID=37&la=1

http://www.investingreece.gov.gr/default.asp?pid=%2036&sectorID=37&la=1

http://www.oecd-ilibrary.org/

http://unctad.org/en/Docs/rmt2011_en.pdf


148

- A financing vehicle, such as a specialised

financing institution for growth, could help

to improve the situation, at least partially.

Government efforts to ease financing conditions

have focused on the European Investment Bank

(EIB) lending to Greek commercial banks so that

they can lend to SMEs. Further efforts have been

made to provide banks with risk-sharing and

additional liquidity facilities. In March 2012, the

Greek government and the EIB signed an

agreement for the creation of a dedicated guarantee

fund supporting lending to small and medium-sized

enterprises. It will guarantee EIB loans to SMEs via

partner banks, up to EUR 1 billion. The first

disbursements under this fund (EUR 150 million)

took place in December 2012. Another EUR 212

million of SME loans were lent by the EIB to Greek

banks separately in the same month. In December

2012 the EIB launched a pilot project under which

it would (counter-) guarantee up to EUR 500

million of export financing for Greek SMEs and

mid-caps.

The Hellenic Fund for Entrepreneurship and

Development (ETEAN), a wholly owned state

corporation, was created in February 2011 with

start-up capital of EUR 1.7 billion. It manages and

runs projects financed via various channels: the

state budget; the public investment programme; an

operational programme (on competitiveness and

entrepreneurship) under the EU’s national strategic

reference frameworks; the European Regional

Development Fund; and the European Fisheries

Fund (EFF). ETEAN provides guarantees for loans,

or letters of guarantee, in favour of small and

medium-sized enterprises for banks and other

financial institutions (such as leasing and venture

capital companies). It also co-invests in other funds

and uses financial engineering instruments, and has

thus far created three funds for energy conservation

with a grant of EUR 200 million from the European

Union’s national strategic reference frameworks;

for fisheries promotion with a support from the

European Fisheries Fund (EFF) grant of EUR 35

million; and for entrepreneurship with a grant of

EUR 460 million, likewise from the national

strategic reference frameworks.

ETEAN recently announced the creation of two

new funds, operating through the entrepreneurship

fund; (a) the fund for business restarting; and (b)

the fund for island entrepreneurship. Both aim to

support SMEs’ access to working capital for

development activities.

The second Economic Adjustment Programme for

Greece contains detailed provisions regarding the

recapitalisation of Greek banks, which should be

completed by the end of June 2013.

Net capital inflows were EUR 2.3 billion in 2012

(vs. EUR 1.3 billion in 2011). The total inflows of

foreign direct investment in Greece fell in 2010-12

and are today at the same level as in 2003-05.

Between 2003 and 2012, fully 69 % of all foreign

direct investments were made in the services

sector.190

A new law on the creation of a development-

friendly environment for strategic and private

investments191 aims to accelerate and simplify

procedures. It includes provisions on developing

the seaside front of Attica and improving the

institutional framework for the founding and

operation of seaplane ports. For strategic

investments, there are proposals for simplified

licencing procedures through the General

Directorate for Licencing, which will handle all

strategic investment requests. The time restrictions

for the submission of investment plans (previously

every April and October), have been removed, and

such plans can now be accepted throughout the

year.

4.8.6 Conclusions

The Economic Adjustment Programme has sought

to adjust the imbalances in the economy. Greece

has started the process of transformation, from an

economy based on consumption to one with a

bigger focus on investments and exports. Exports

have already increased over recent years but, as a

result of the recession and the credit crunch,

investments are still disappointing.

The regulatory environment has constrained

businesses and entrepreneurship, and these,

combined with the lack of competition, have led to

lacklustre productivity and competitiveness.

However, steps are being taken to tackle many of 190 http://www.investingreece.gov.gr. 191 Law 4146/2013.

http://www.investingreece.gov.gr/


149

the structural barriers and regulatory failings.

Encouragingly, many efforts are starting to show

results, and the ranking of Greece in the World

Bank’s ‘Doing Business’ indicators has improved.

Further significant measures have been taken to

ease the creation of companies, and to simplify

licensing procedures and investment

authorisations. With the technical assistance of the

Task Force for Greece, cumbersome export

procedures are being simplified.

The difficult economic conditions, continuing

uncertainty, and in particular the credit crunch

continue to make conducting business difficult, in

particular for SMEs. Economic growth is one of the

top priorities of the government, and in this context,

reforming the public administration remains central

in terms of securing the capacity and competence to

implement newly adopted legislation and to

improve the business environment. Reforming the

economy must remain a priority in order for the

required changes to take place. A dynamic

corporate sector is crucial to re-starting the

economy and achieving growth. By tapping the

entrepreneurial potential of citizens and creating the

right business environment, Greece can overcome

its difficulties and achieve sustainable economic

and employment growth.

Country chapter: Spain

150

4.9. Spain

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Spain

2007

latest available


Innovative industr

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Susta

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151

Figure 4.9: Manufacturing sectors – Spain (2010)

Source: Eurostat

4.9.1 Introduction

Manufacturing plays a slightly smaller role in Spain

than in the EU on average (13.3 % of total value

added versus 15.3 % for the EU). Spanish firms are

specialised in low-tech manufacturing

(manufacturing of food products and beverages,

textiles and wearing apparel, etc.) and less-

knowledge-intensive services (trade,

accommodation and food services, travel agencies,

etc.). High value added sectors such as high-tech

manufacturing and knowledge intensive services

are still under-represented in terms of the number of

firms, employment and value added.

Spain continues to adapt to the correction of

imbalances that started in 2008. In the last couple of

years it has recovered about half of the cost

competitiveness lost between 2000 and 2008,192

although this is partly as a result of massive labour

shedding in low value added sectors, and longer

working hours. The adjustment of current account

deficit, investment in construction, and credit

growth has progressed. Restoring sustainable

external equilibrium requires a move to a sizeable

current account surplus, backed by reallocation of

resources to the tradable sector. Some improvement

192 Measured as Unit Labour Cost and based on data from

Eurostat and European Central Bank calculations.

is apparent in various indicators, including strong

export performance.


Innovation

Over the last decade, efforts have been made to

improve research and innovation performance.

However, the impact seems to have been limited, as

there has been little movement towards a more

knowledge-based economy. Research and

innovation suffer from low R&D investment by the

private sector and the increasingly regional

dimension of innovation policy. These challenges

have been aggravated by the crisis, with a fall in

public investment in R&D193 and a significant loss

of technologically innovative firms.194

The latest Innovation Union Scoreboard places

Spain, as before, in the group of moderate

innovators with performance below the EU

average. In that group, the country had the second-

lowest growth rate in the period 2008-12, and has

193 In relative terms (as percentage of GDP), Spain has

managed to overall maintain its level of expenditure with a slight decrease in 2011 to 1.33 % (versus 1.39 % in 2010 and 2009, and 1.35 % in 2008). Source: Eurostat. .

194 Spain accounted for 44 888 technologically innovative SMEs in 2007, compared to only 25 461 in 2011. Source: Ministry of Economy and Competitiveness, Spain.


152

been unable to catch up with ‘innovation followers’

and ‘innovation leaders’ – in addition, regional

innovation performance is uneven and, taken

separately, the regions range from innovation

leaders to moderate innovators.195 Spain’s relative

strengths are seen in research (scientific

publications); in the percentage of population aged

30-34 with tertiary education; and in the

commercialisation of innovation. The main

weaknesses lie in the low level of private R&D

investment; the small number of innovative SMEs;

and the low licence and patent revenues from

abroad. The diminishing number of tertiary students

in sciences (-27.3% over the last ten years) is a

problem for the innovation potential.

The authorities are addressing these challenges with

a new ‘Spanish strategy for science, technology and

innovation’ and the implementing ‘State plan for

scientific and technical research and innovation’,

both adopted in February 2013. The new strategy

seeks to increase business R&D expenditure, ease

the transfer of knowledge between actors, and

foster smart specialisation at regional level. The

proposed reforms cover the governance system, the

quality of human resources, the funding allocation

system, knowledge transfer, strengthened public-

private cooperation, key challenges for society, and

the internationalisation of the system. Although the

aims of the strategy are laudable, the impact of the

strategy will depend on its effective implementation

through the state plan and the regional plans for

scientific and technical research, and innovation.

The government has also announced new fiscal

incentives to foster private investment in R&D and

the transfer of technology.196 In particular, R&D

deductions that are not applicable to a financial year

could be recovered subject to the creation or

maintenance of employment, and a bigger part197 of

the income that originates from the transfer of

certain intangible assets, such as patents, will be

exempted.

Skills

The most pressing issues are the difficult transition

from education to work, the high rate of early

195 Source: Regional Innovation Scoreboard 2012, European

Commission. 196 This measure will be part of the forthcoming law to

support entrepreneurs and their internationalisation. 197 60 %, instead of the current 50 %.

school leavers, and the skills mismatches between

education and labour market. Indeed, the Spanish

labour market is characterised by a mix of workers

with high skills and even over-qualification198

(especially among young people) as well as a high

proportion of low-skilled workers.199 This reflects

the dominance of construction and tourism

activities. The over-qualification points to skills

mismatch and lack of relevance of education200 and

training, and poor transition from school to work.

Further, the education system puts insufficient

focus on entrepreneurial skills.

The labour market reform of 2012 significantly

amended the system for training and

apprenticeship. This was followed by the launch of

a dual vocational training system201 to better adapt

the training supply to business needs, as well as the

Entrepreneurship and Youth Employment Strategy

2013-2016. The percentage of 18-64 olds believing

they have the right skills and knowledge to start

business is above the EU average.202

In May 2013 the government approved a reform of

the education system that is now waiting for

parliamentary approval. It seeks to introduce

entrepreneurship-related content in the secondary

school curriculum.. The main goal is to reduce the

number of early school leavers and to improve the

transition from school to working life.

Sustainability

Various measures were adopted in 2012 to contain

the so-called tariff deficit203 of the electricity sector,

including a single tax rate (7 %) on all power

generation. In addition, premiums for new 198 22 % of all employees in Spain are over-qualified for their

post. In the case of young people (25-34), 38 % of them are over-qualified for their position. Source: Social Developments Employment and in Europe 2012, European Commission.

199 The employment rate of people with pre-primary, primary and lower secondary education was 48.2 % in 2012 (versus 61.2 % in 2007).

200 About 40 % of young people between 25 and 34 years old with a tertiary education degree are not employed in occupations that typically require this qualification. Source: OECD Economic Surveys Spain 2012.

201 Royal decree law 1529/2012 of 8 November. 202 Global Entrepreneurship Monitor. 203 Access tariffs to the electricity system do not cover

regulated costs (e.g. transportation costs, distribution costs, subsidies for renewable energy production or adjustment services). As a result, a so-called tariff deficit is generated within the system at the expense of utilities. The cumulative tariff debt is EUR 29 billion (equivalent to almost 3 % of GDP).


153

renewable projects were withdrawn.204 To complete

these measures, the government has also presented

a plan for a comprehensive reform of the electricity

sector. There are several projects with France205 and

Portugal206 that aim to double the capacity of the

electricity interconnections with these countries.

The Government has also taken steps207 to promote

efficient use of energy, including through

environmental taxes;208 the suppression of some

exemptions of the tax rates for gas and coal; and the

establishment of a fee for the use of water for

producing electricity. Further new measures are in

the pipeline to reduce carbon emissions, including

the adoption of green taxes, a law to promote

calculation of the carbon footprint, and the national

framework plan for waste.

Finally, the government is working on a new bill on

environmental impact evaluation with the aim of

simplifying procedures and bringing together

existing legislation on strategic environmental

evaluation and on the evaluation of environmental

impact.


Exports have grown considerably since 2009,

although the pace of growth decelerated in 2012.209

This comes on top of a decade-long strong

performance, as the export share stayed relatively

stable in spite of sustained losses in price

competitiveness, and the rise of emerging

economies. However, exports as a share of GDP are

below that of other European economies, and the

share of knowledge-intensive service exports with

high added value is well below the EU average.210

204 Royal decree law 1/2012 suspended temporarily all new

renewable capacity registration. 205 A study on the viability of the routes for the proposed

interconnections will be finalised in 2013. The aim is to duplicate the current capacity to 2 800 MW in 2014 and 4 000 MW in 2020.

206 Spain is working on two projects to reach an interconnection capacity of 3 000 MW, which would be in force in 2014 and 2016 respectively.

207 Law 15/2012 of 27 December 2012. 208 A single tax (7 %) on the value of electrical production, a

tax on the production of nuclear fuel and waste, and a tax on the storing of nuclear waste and fuel.

209 Spanish exports grew 3.8 % in 2012, 15.2 % in 2011 and 16.8 % in 2010 in current prices according to customs data.

210 The weight of exports in Spain’s GDP has risen from 23.9 % in 2009 to 32.2 % in 2012 but remains below the

The recent export dynamism reflects improvement

in both cost and non-cost factors. As unit labour

costs have decreased, product and geographical

diversification have helped to sustain export

performance. Indeed, exports of services have

grown more rapidly than goods, and now account

for about one third of the total. In addition, the

services exported have become more diversified,

and besides tourism they include transport and

business services. There has also been some

reorientation towards emerging markets, which has

limited the negative impact of the weakness in

Europe.

Spain lags slightly behind the EU-average in most

indicators on SME internationalisation.211 The costs

of trading are higher than the EU average, although

this does not appear to influence the time required

to import or export, which is shorter than in the

EU.212 Moreover, almost 88 % of exports in 2012

were by the largest 10 % of exporters,213 suggesting

a dichotomy between a small number of very

competitive large exporters and a large number of

less competitive exporting firms.

In 2012, two previous programmes for export

promotion214 were merged into a new programme

called ICEX-next, which provides tailored advice

and financial support for the internationalisation of

SMEs.215 There are also plans to develop new

export markets216 in 2013, with a focus on Asia.

Spain has also strengthened the links between

internationalisation and innovation by integrating

the external network of the Centre for industrial

technological development217 into the ICEX

network.

EU average (42.6 %). Source: World Bank, OECD and Instituto Nacional de Estadística.

211 For further details, see SBA factsheet 2012, Spain. European Commission.

212 Source SBA fact sheet for Spain 2012, European Commission.

213 Source: ICEX statistics. 214 APEX was a programme to raise awareness of the benefits

of internationalisation among SMEs with no or minimal exporting experience; and ICEX PIPE provided consultancy services and economic support to new exporters.

215 Around 8000 have benefited from ICEX PIPE over the last 7 years. ICEX-next is expected to support around 400 enterprises per year in the short term, and 500 to 600 per year in the medium term.

216 ‘Planes integrales de desarrollo de mercado’. 217 The Centre for industrial technological development

(CDTI) is a public entity which fosters the technological development and innovation of Spanish companies


154

As part of the forthcoming law to support

entrepreneurs and their internationalisation, the

government plans to strengthen support bodies, as

well as to improve financial instruments for this

purpose and firms’ access to foreign public

procurement of international financial institutions.

Further, the government plans to adopt a new law

on chambers of commerce to enhance their role in

supporting internationalisation.


administration


The legal and regulatory framework remains very

burdensome, despite improvements over the years.

In particular, it is difficult to start a business.218

Although the time needed has come down from 47

to 28 days, it remains above the EU average. The

licensing system is very complex, and the time

needed to obtain an operating licence is the longest

in the EU, at 116 days.219

However, the government has generalised the use

of the ‘express licence’ regime, whereby a

declaration is enough to launch the economic

activity, in the case of small and medium retail and

other services. The government now plans to extend

this regime to larger outlets and other types of

activities as part of the forthcoming law to support

entrepreneurs and their internationalisation.

Promotional activities in retail have been

liberalised; the requirements for road transport

firms simplified; and the opening of petrol stations

facilitated. Liberalisation of passenger rail transport

has started with the long-distance tourist train

segment that has been opened to competition.

In February 2013 the government announced an

‘Economic stimulus plan and support for the

entrepreneur’. The first measures220 included

facilitating access to finance; a flat rate of EUR 50

for social security charges for new self-employed

persons during the first six months; reconciling

through channelling the funding and support applications for national and international R&D&I projects of Spanish companies.

218 In the World Bank’s ‘Doing Business’ Indicators for starting a business, Spain ranks 136th for this specific area, while its overall ranking is 44th.

219 Source SBA fact sheet for Spain 2012, European Commission.

220 Through the Royal decree law 4/2013, of 22 February.

unemployment benefits with self-employment for

up to nine months; and lower taxes for new firms

and self-employed persons for two years. Other

measures are planned for 2013, including a law on

market unity, and the omnibus law to support

entrepreneurs and their internationalisation that

should be adopted by the parliament in 2013. This

would include the creation of a ‘limited liability

entrepreneur’; the establishment of new out-of-

court settlement mechanisms for bankruptcies;

fiscal incentives;221 measures to facilitate access to

finance;222 exempting more activities from local

licences; removing barriers to accessing public

procurement; measures to foster the

internationalisation of the economy;223 and

measures to reduce the administrative burden.224

The draft law on market unity225 aims at addressing

the regulatory fragmentation of the domestic

market, which hinders competition and prevents

businesses from taking advantage of economies of

scale and scope. If effectively implemented, it

could facilitate the movement of goods and

services, as well as simplify licensing requirements.

In parallel, the government has launched a review

of the existing regulatory framework in the interests

of simplification, rationalisation and coherence.

According to the authorities, about 5 000 pieces of

legislation have already been identified for revision.

Moreover, the government is working to reduce red

tape in the fields of restoration and electronic

communications.

Finally, the delayed reform of professional services

is scheduled for 2013. The government plans inter

alia to reassess the activities restricted to a selected

221 In particular, tax deductions for the reinvestment of profits

and investments in R&D, a special VAT voluntary regime for SMEs to defer the payment of VAT to the State until the invoice has been collected, and tax incentives for providing capital to start-ups in the form of income tax reductions and partial exemption from taxation of capital gains.

222 Including the elimination of charges linked to the issuance of corporate debt, and new instruments for financing the internationalisation of businesses.

223 Including a new visa regime for attracting talent and investment, and the formulation of an internationalisation strategy for Spain.

224 This includes speeding up and simplifying certain procedures necessary to start up a business, reducing statistical and accounting requirements, and establishing a ‘one in one out’ clause guaranteeing that at least one burden of equivalent cost is removed for each administrative burden introduced.

225 Adopted by the Council of Ministers in July 2013.


155

group of professions and the rules on membership

of professional associations.


The government set up a commission for the reform

of public administration whose final report was

issued in June 2013. The report included proposals

to be implemented between 2013 and 2015 around

the following four axis: reducing the overlap

between central and regional governments;

streamlining and rationalising public bodies;

merging of horizontal services (e.g. procurement);

and administrative simplification. In parallel, the

reform of local administration will clarify

competencies to avoid any overlap with other

levels. The government plans to set up a body to

report back every quarter on the implementation of

the proposed measures.

The law on transparency currently being debated by

the parliament will establish good governance

requirements for public administration, contributing

to simplification of administrative burden and

easing access to public information.

The areas of concern in the judiciary include low

clearance rates, a high case backlog and relatively

lengthy proceedings,226 but reforms aim at tackling

some of these issues. The reorganisation of the

courts and judiciary is scheduled for the end of

2013. Information and communication technologies

for the judiciary are not yet readily available

everywhere.


Access to finance remains one of the most

problematic areas for SMEs,227 including the need

for working capital. They rely heavily on bank

lending for their financing needs, but loans are not

readily available228 despite the improvement in

226 EU Justice Scoreboard 2013 – Note that there was a

country-specific recommendation on these issues in 2013. 227 27 % of SMEs point to access to finance as the worst

problem of all. Source: survey on the access to finance of SMEs in the euro area, April to September 2012, European Central Bank.

228 79 % of SMES consider that the situation has deteriorated (37 %) or remained unchanged (41 %) over the previous 6 months, while only 8 % consider that it has improved. The level of interest rates increased (76 %) and other costs of financing (80 %), collaterals (61) increased, while the available size of loans remain unchanged (42) or

bank balance sheets. This has been in particular due

to the difficult macroeconomic and firm-specific

outlooks, and the stress in sovereign debt markets.

The stresses have been reflected in higher interest

rate differentials compared to other countries.

Meanwhile, alternative sources of financing remain

limited, due to lack of both demand and supply.

The authorities are implementing a comprehensive

strategy aimed at restoring the credit flow. This is

based on restructuring the financial system and

fostering non-bank intermediation. The government

is redirecting support towards working capital

needs, as this is seen as a higher priority than

investment. Despite this, the necessary

deleveraging of the private sector weighs on

economic growth and defaults are soaring,

especially in the construction and real estate

sectors, although the number of non-performing

loans with a public guarantee remains stable.

The counter-cyclical role of the Public Credit

Institute (ICO) has become more important. In

2012, over 10 % of business financing for maturities

over one year was granted through ICO credit

lines.229 It has simplified its facilities, focusing on

two actions: boosting funding for firms and

entrepreneurs, and financing internationalisation.

The credit lines for 2013 have been supplemented

with additional EUR 11.5 billion.

The restructuring of the banking sector230 has led to

the disappearance of some savings banks that were

merged with or acquired by other entities. This has

left some SMEs, in particular smaller firms, without

their traditional banker, increasing the costs caused

by information asymmetry at a time when banks are

generally reluctant to lend. The government is

reinforcing the mutual guarantee companies by

increasing the capital of the public counter-

guarantor. Its budget for 2013 has been increased to

decreased (45). Source: Survey on the access to finance of SMEs in the euro area, April to September 2012, European Central Bank.

229 ICO granted EUR 11.5 billion through second-floor facilities (which ICO provides through Spanish Credit Institutions) to over 160 000 SMEs.

230 In June 2012, Spain formally requested financial assistance for the recapitalisation of the Spanish financial institutions. The assistance was granted in July in the form of a programme for the repair and reform of the Spanish financial sector. The core of the programme involves sufficient recapitalisation of Spanish banks, where needed, for which up to EUR 100 billion were made available by EFSF/ESM.


156

EUR 32 million, an increase of 67 % compared to

2012. It has also increased the coverage rate of

loans for working capital (up to 60 %) and the

internationalisation of SMEs (up to 75 %).

The government has also adopted measures to

promote alternative financing mechanisms,

including the launch of a ‘Spain start-up co-

investment’ targeting early-stage equity and

mezzanine finance. Further, it seeks to reduce the

credit requirements for asset securitisation funds,

and launch an incubator programme with a budget

of EUR 50 million. As regards venture capital,

other developments include the launch of the

‘Isabel la Católica’ fund, with a budget of

EUR 30 million, and the creation of a fund of funds

with EUR 1 200 million to invest. In addition, an

Alternative Bond Market should become

operational in 2013. The existing support

programme for the operating costs of business

angel networks will also be extended.

The government also intends to introduce an

‘Elevator Law’ to facilitate transition from the

regulated stock market to the alternative market and

vice versa. In addition, planned regulatory changes

will facilitate the operations of venture capital

funds. The omnibus law to support entrepreneurs

and their internationalisation includes a number of

measures to facilitate access to finance, like tax

incentives, amendments to the regulatory

framework for out-of-court refinancing settlements,

and new instruments to promote export credit.

Finally, the JEREMIE scheme of the European

Regional Development Fund (ERDF) has been

restructured to ease SMEs’ access to credit, with

EUR 320 million from the ERDF.

The liquidity problems of firms have been

aggravated by long delays in receiving payments, in

particular from the public sector.231 To ease this

situation, the government has approved a set of

measures aimed at regularising the arrears that

231 Spain remains one of the Member States with the longest

payment delays attributable to public authorities, well above the EU average. At European level the public sector pays its bills, on average, after 65 days, about 13 days later than the private sector (52). National averages are however very different, and in some countries, in some sectors (health, constructions) the bills are settled after more than six months. At national level Spanish public authorities are paying their invoices after 160 days on average. In business to business commercial transactions it takes an average of 97 days to be paid. European Payment Index 2012. Intrum Justitia.

regional and local governments have built up.232

This provided about EUR 27 billion233 of liquidity

to firms in 2012, and has been extended to 2013

with an allocation of EUR 2.7 billion. In parallel,

the government set up in June 2012 a voluntary

scheme for the centralisation of public debt

issuance, to provide liquidity to regional

governments. This mechanism provided

EUR 17 billion to regional administrations in 2012,

of which EUR 6.7 billion constituted payments to

SMEs. Further, the late payments directive234 has

been transposed, and effective implementation is

crucial to avoid new arrears.

There has been increased interest in investing in

Spain from emerging economies (Brazil, Mexico,

India and China). The main incentives for such

investment are infrastructure, the level of

technology, and the structural reforms. The

promotional structures have been streamlined and

the focus is on attracting foreign direct investment

and helping firms to finance their expansion. A new

directorate on financing and investor relations has

been set up to offer services to businesses that seek

international investors. ‘Invest in Spain’ is also

linked with the ‘Marca España’ project, which

seeks to improve the image of the country abroad.

Finally, the omnibus law to support entrepreneurs

and their internationalisation will reform visas and

residence permits to attract talent and investment

from abroad.

4.9.6 Conclusions

Spain is undergoing a profound structural

adjustment to correct the large internal and external

imbalances built up during the housing and credit

booms. Firms are still struggling with the impact of

the recession and the worsening credit conditions.

The government’s reform agenda has focused on

two key areas, easing access to finance, and

improving the business environment.

Lack of access to credit remains one of the biggest

concerns of SMEs. Bank credit for SMEs is

relatively costly and difficult to attain, and the

232 Royal decree law 4/2012 of 24 February, and Royal

decree law 7/2012 of 9 March. 233 5.6 million invoices were paid for a total amount of EUR

27.3 million, of which 98 % constituted payments to SMEs. All debts had been paid by end of November 2012.

234 Royal decree law 4/2013 of 22 February.


157

interest rate differential is high compared to other

Member States. Although measures adopted under

the banking sector recapitalisation programme

should ultimately help to alleviate this situation, for

now there are no signs of significant improvement.

The government is trying to ease credit constraints

through financial instruments, in particular loan

guarantees, and promoting alternative financial

instruments.

Measures have also been adopted to simplify the

business environment. Overall, progress has been

slow and some flagship reforms are still pending,

such as the law to support entrepreneurs and their

internationalisation; the reform of professional

services; and the law to guarantee the unity of the

market.

The structural reforms need to be completed before

their full impact on growth and competitiveness is

felt. In particular, this applies to improving the

business environment, and to enhancing non-cost

competitiveness.

Country chapter: France

158

4.10. France

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France

2007

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Innovative industr

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Susta

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Export

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N.A. (2007)

N.A.


159

Figure 4.10: Manufacturing sectors – France (2010)

Source: Eurostat

4.10.1 Introduction

Manufacturing plays a smaller role in France than

in the EU as a whole (10 % of value added vs.

15.3 % for the EU in 2012). In terms of the sectoral

breakdown, France is specialised both in

technology-driven (aerospace) and marketing-

driven industries (luxury). Most of the goods and

services belong to the category of medium-high

innovation, but there is less activity in high

innovation sectors.

Although productivity is high, the competitiveness

gap vis-à-vis the best performers is widening,

driven by both cost and non-cost factors, also in the

context of a deteriorating external position and high

public debt.235 To restore competitiveness, the

government adopted in November 2012 an

overarching strategy — the Pact for Growth,

Competitiveness and Employment — structured

around eight competitiveness policy levers and 35

decisions aimed at lowering taxes and business

costs, facilitating access to finance, supporting

innovation, and ensuring a simpler and a more

stable regulatory, administrative and tax

environment. Further, in April 2013, a set of ten

enterprise-friendly measures were announced

following the Assises de l’entrepreneuriat, most of

235 In-Depth Review, COM(2013) 199 final.

which will take effect in 2014. The government has

also announced a complementary set of measures to

further reduce red tape and administrative cost for

companies.


Innovation

The Innovation Union Scoreboard 2013 classifies

France as an innovation follower, although R&D

intensity has grown from 2.08 % in 2007 to 2.27 %

in 2009, and was stable in 2010 and 2011, leaving it

well below the national target of 3 %. In particular

business R&D intensity, which has increased

slightly despite the crisis, from 1.31 % of GDP in

2007 to 1.42 % of GDP in 2011,236 remains

significantly below the 2020 target.

The level of business R&D intensity is relatively

low compared to the innovation leader countries.

Besides a few highly innovative and exporting

firms, many small firms are not investing in

innovation, particularly in non-R&D innovation, as

the percentage of SMEs innovating in-house and

introducing product or process innovations is below

236 Business R&D intensity progressed from 1.33 % of GDP

in 2008 to 1.40 % in 2009 and to 1.43 % of GDP in 2010 and 2011.


160

the EU average.237 While France is a net exporter of

services, the share of knowledge-intensive services

with high added value is well below the EU

average. There is potential to draw larger benefits

from the science and technology base, besides

making technology transfer more efficient. In

particular, non-technological innovation

(marketing, branding, product customisation,

advanced customer support) and non-breakthrough

innovation (e.g. embedded software) provide high

added value and contribute to firm growth,

promoting competitiveness.

The competitiveness pact identified innovation as

the route to improved competitiveness, and a set of

measures has been announced, including further

public support for innovation by businesses by

extending the research tax credit beyond 2013,

retargeting the Pôles de compétitivité to better focus

on projects with market potential, increasing the

transfer of public R&D, spreading digital and key

enabling technologies, steering public procurement

towards innovative goods and services, and setting

up a working group at national level to reflect on

the various levers of innovation (economic sectors,

taxation, innovation culture, support schemes).

Also, the Investment for the future programme is

expected to facilitate investment in innovation

through disruptive technologies, including by

SMEs. Further, the tax credit for innovative new

companies should allow about 2 600 companies

(jeunes entreprises innovantes) to enjoy full

exemption from social security contributions for

eight years, with a broader definition of eligible

expenses.

Overall, the innovation system would benefit from

a stable and clear environment for business research

and innovation, and where redundancies and

overlaps would be limited.

Skills

The share of the population with tertiary education

is above the EU average. However, the skills

acquired do not seem to fully match the needs of

businesses, in particular for ICT engineering and

management skills.238 Moreover, participation in

237 Research and Innovation Performance in France: Country

profile 2013. 238 29 % of employers report recruiting difficulties, which is

the second highest in Europe. EU skills panorama 2012,

lifelong learning is low compared to EU average,

which may further aggravate the skills mismatch.

The 2013 reforms of compulsory and higher

education, and the research system, seek to adapt to

the digital age.239

The guidance available does not seem sufficient to

allow students to identify courses offering the

greatest employment opportunities despite major

reforms since 2007 that have introduced measures

to support more informed choice and guidance for

students.

Increasing the availability of support services to

enhance the capacity of SMEs to anticipate their

employment and skills needs, and to manage

restructuring would help to manage structural

change and improve the use of human capital. A

bill on further decentralisation of national

competencies would increase the role of regions in

training, and improve the match with regional skills

needs.

Sustainability

Energy intensity in industry and the energy sector is

slightly lower than the EU average, and due to the

energy mix, carbon intensity is one of the lowest in

the EU. In addition, electricity prices for mid-sized

enterprises are well below the EU average.

However, increasing energy demand, and the plans

to reduce the use of nuclear power, mean that other

energy sources will have to be developed. This

could lead to higher electricity prices for industrial

consumers in the medium term, in particular for

energy-intensive industries. However, the

electricity generation market remains very

concentrated and a commitment to further open it to

competition could mitigate price developments.

To reach the Europe 2020 target,240 significant

investment will be necessary in renewables. This

may create potential for French suppliers to

http://euskillspanorama.ec.europa.eu/KeyIndicators/Country/NationalData.aspx?lookupid=10&.

239 The first one encompasses the setting up of a ‘public service for digital education ’and legal measures to facilitate the use of OER by teachers. The bill on higher education (HE) and research foresees the provision of OER by the public HE institutions as well as related services.

240 23 % of renewable energy in final energy consumption (13.1 % in 2011).

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161

specialise in technologies such as offshore wind

and tidal power, or to develop activities such as

maintenance and recycling.

A new tax on lorries (above 3.5 tonnes) has been

announced and is due to enter into force in October

2013. It is expected to increase the cost of freight

by 5 % and lead to optimisation of road freight (e.g.

a higher load factor). A significant shift to rail

freight remains the long-term objective, but this

would require significant investment in

infrastructure and an appropriate competition

framework.


As underlined by the in-depth review,241 France has

a growing trade deficit, which reflects the long-term

decline in export market shares: the trade balance

has been deteriorating since 1997 and showed a

deficit of 2.5 % of GDP in 2011. The market share

of exports fell by 11.2 % between 2006 and 2011.

In 2012 the current account improved because of

slow domestic demand and larger exports (in

particular in aerospace).

This situation is due to persistent losses in cost and

non-price competitiveness. Unit labour costs in

business services are higher than in comparable

Member States, and the cost of services is an

important part of production costs in

manufacturing. Compared to Germany, unit labour

costs are higher for companies below 1 000

employees. At the same time, the structural

weaknesses in areas such as taxation, labour

rigidities, the regulatory environment, regulated

professions, and competition in product markets

slow down productivity growth and weigh on the

profitability of firms.

France remains the third largest exporter of goods

in the EU, accounting for 10.7 % of EU exports to

non-member countries.242 France exports mainly

aircraft, food, chemicals, industrial machinery, iron

and steel, electronics, motor vehicles and

pharmaceuticals. The share of high-tech exports in

total exports is the fifth highest in the EU.

241 COM(2013) 199 final (under Regulation (EU) No

1176/2011). 242 Eurostat, International trade in goods (July 2012).

The competitiveness pact sets a national target to

achieve a trade surplus by 2017, excluding energy.

Supplementary measures to stimulate exports were

announced in December 2012, for example

accompanying a limited number of SMEs and mid-

caps with high export potential on foreign markets

or promoting France as a quality brand abroad.


administration

According to various competitiveness rankings,

France scores well but has slipped back slightly

compared to previous years.243 While the

infrastructure is the fourth best in the world, the

labour market appears relatively less flexible than

in its peers, and the tax regime is considered as

particularly distorting.244

The procedures for starting up a business are less

complex in France than in the EU on average, and

the cost of starting a company is lower — as is the

cost of enforcing contracts. France is close to the

EU average in the availability of business-related e-

government services, the use of evidence-based

instruments and the administrative cost of taxation.

However, the perception of the legal and regulatory

framework by businesses still scores clearly below

the EU average, ranking 17th among the Member

States.

The complexity of the legal and regulatory

environment was acknowledged in the

competitiveness pact and a ‘simplification shock’

was included in the national reform programme.

Several measures have been announced, including

some streamlining of public subsidies to enterprises

(including state aid), some reduction in the existing

‘gold-plating’ of EU legislation, and the inclusion

of an SME test in the impact assessment

methodology.245 Other measures include the target

243 In the 2013 World Bank Doing Business Report, France

ranks 34th (out of 185 countries), slightly down on previous years (32nd in 2012 and 28th in 2011). According to the Global Competitiveness Index, France ranked 21st in 2012-13 (out of 144 economies), losing three places compared to 2011-12 mainly due to falling confidence in public and private institutions (down four places) and the financial sector (down 13 places in trustworthiness).

244 Global Competitiveness Report 2013-14. 245 Detailed guidance is available to Ministries since 2009.

Although the impact assessment methodology is not publicly available, many impact assessments are now published. Their content and level of detail varies


162

to eliminate ten information obligations by 2016,

and a moratorium on new rules (one-in, one-out

policy).

The taxation system remains highly complex

because of multiple exemptions and derogations,

and constant changes. This leads to a lack of

transparency for businesses, especially SMEs and

foreign investors. The tax wedge on labour is

high,246 and the overall tax burden on businesses

has substantially increased since 2010.

However, new measures like the tax credit for

competitiveness and employment247 are expected to

decrease the tax burden on labour for companies by

EUR 20 billion. The impact of this measure will

mostly be felt from 2014 onwards, although a pre-

financing has been set up for SMEs, and it is too

early to assess its impact on corporate investment in

the medium term, particularly in manufacturing. In

any case, this tax credit will only partially offset the

increases in the tax burden on companies enacted

since 2010. Further steps would help in shifting the

tax burden from labour to other forms of taxation

that weigh less on growth and external

competitiveness.248

Despite the absence of minimum standards of

stakeholder consultation, such as minimum

consultation deadlines, stand-alone processes such

as the Assises de l’entrepreneuriat or the

consultation during the preparation of the Gallois

report, have offered significant opportunities for

business stakeholders to express their views and

have led to something of a consensus on the nature

and causes of competitiveness losses, if not on

policy priorities and appropriate remedies. A

permanent consultation of enterprises on

simplification has recently been announced.

In April 2013, as a result of discussions within the

Assises de l’entrepreneuriat, a set of enterprise-

friendly measures were announced, most of which

will take effect in 2014. The measures include the

encouragement of a second chance in the event of

failure (by abolishing the blacklist for single

business failure); dedicated funding through the

significantly, not least as regards the analysis of policy options and of stakeholder interests.

246 OECD Economic Surveys: France, March 2013. 247 Crédit d’impôt pour la compétitivité et l’emploi. 248 France is among the EU countries with the lowest share of

environmental taxes and VAT in GDP.

Public Investment Bank to help business start-ups

in disadvantaged areas; special visas for foreign

start-up investors; tax relief over five years for

equity investments in start-ups; the creation of

business incubators (Maisons de l’international) in

major cities throughout the world (in particular in

the United States and Asia) to encourage French

SMEs to export their goods and services; the

introduction of a student entrepreneur scheme

enabling anyone setting up a company after

completing their studies to continue to benefit from

their student status; and introducing

entrepreneurship and innovation learning in

secondary school.

If fully implemented, such measures can have a

positive impact on the business environment.

However, in order to boost competitiveness, it

would be helpful to address the challenging

structural weaknesses, in particular the competition

framework. The cost of services could be lowered

by increasing competition. As highlighted by the

Commission and the Council in the country-specific

recommendations, unjustified barriers persist in

several areas, including regulated professions (in

particular the legal form, shareholding structure,

quotas and territorial restrictions); retail trade

(spatial planning restrictions, authorisation

procedures for retail outlets); network industries, in

particular the electricity market (high concentration

with only limited connections to neighbouring

countries); and rail transport (no competition in

domestic passenger transport).


In terms of overall government effectiveness as

measured by the World Bank, France performs just

above the EU average, but not as well as in the

previous year.

Coordination among administrative levels and

communication with enterprises could benefit from

further improvement. There is no single contact

point at local level for enterprises on state aid or

other public support. The creation of the Public

Investment Bank is expected to provide a single

contact point for public loans, guarantees and

export financing, and may enable the rules for

access to be harmonised. The management of other

forms of public financial support, including state

aid, remains scattered between numerous local

authorities (municipalities, ‘inter-municipal’


163

bodies, ‘departments’, regions, future

‘metropoles’). Policies on economic development

and innovation are adopted and implemented by

several layers of government. The draft law on

decentralisation provides for the creation of

‘conferences’ to coordinate activities between all

local authorities.


The amount of overall outstanding credit to

enterprises remained stable in 2012, with variations

between sectors and types of firm. In December

2012, the amount of outstanding credit had

increased by 0.8 % compared to December 2011.249

Outstanding credit to SMEs, excluding individual

entrepreneurs and real estate activities, grew by

2.5 % year-on-year. Credit to the building (+7.5 %)

and retail (+5.4 %) sectors increased, while that to

the manufacturing sector decreased by 3.3 %.

However, short-term cash facilities tightened by

3.5 %.

As a whole, greater non-price competitiveness

would require significant additional investment by

businesses, not least in R&D and human resources,

while the profitability of non-financial companies is

declining and at its lowest level since 1985. Most

firms are dependent on credit, particularly in the

manufacturing sector, as self-financing capacity has

tended to deteriorate in recent years, while

alternative sources of financing such as venture

capital, business angels, equity markets and other

equity funding remain limited, in particular for

SMEs. In addition, payment times have not

improved sufficiently to help to address this lack of

financing. However, the situation in France is much

better than in many other Member States.

The competitiveness pact has identified these

challenges and included several commitments to

improve access to finance, in particular through

additional public schemes (guarantees and loans);

measures on savings taxation (including tax

incentives to encourage investment in stocks and

corporate debt issued by SMEs and mid-cap firms);

and measures to facilitate access to equity markets

by SMEs and mid-caps (including the creation of a

new stock exchange).

249 Source: Banque de France.

Although the regulated savings accounts are not

meant for the financing of enterprises, one option is

that a small part could go to the new public

investment bank, Bpifrance, for equity financing of

(non-listed) SMEs and mid-caps. Similarly, a new

life insurance contract could be created to allow

insurance companies to invest more in listed

companies and corporate bonds, which could

mainly benefit larger companies. A new specific

savings account has also been planned to favour

investment by banks in (listed) SMEs. The take-up

of pre-financing provided by the Crédit d’impôt

pour la compétitivité et l’emploi seems to benefit

microenterprises that need immediate cash flows.

Such measures could improve the external

financing of businesses, in particular SMEs, but the

impact depends on their effective implementation.

As regards foreign direct investment, the inward

stock amounted to 35 % of GDP in 2011 compared

with 29 % in 2000. Overall, foreign companies

account for a third of exports and 20 % of business

expenditure on R&D. The Invest in France Agency

is the official body that provides information and

support to foreign investors in France and promotes

France’s business image and attractiveness abroad.

4.10.6 Conclusions

Improving competitiveness has become the key

challenge of the French public reform agenda and a

number of measures have been announced, notably

as part of the competitiveness pact, and following

the suggestions of the Assises de l’entrepreneuriat.

These initiatives relate to better access to finance,

improved support for innovation, encouraging

entrepreneurship and improving the regulatory and

administrative environment.

While the measures announced would represent

steps in the right direction, most of them still have

to be effectively implemented. The final impact

depends on how effective this implementation is,

and how well the measures are coordinated, with a

view to avoid overlaps and further complexity, and

to maximise synergies.

To achieve a significant improvement in

competitiveness, it would be necessary to

supplement these reforms with measures removing

the structural weaknesses that slow down

productivity growth and hamper the profitability of

firms, in particular labour market rigidities,


164

regulatory burden, complex taxation and limited

competition.

Country chapter: Croatia

165

4.11. Croatia

-3 -2 -1 0 1 2 3





























Croatia

2007

latest available


Innovative industr

ial policy

Susta

inable

industr

yB

usin

ess E

nvir

onm

ent and E

ntr

epre

neurs

hip

Fin

ance a

nd

Investm

ent


Export

perf

orm

ance

Public

adm

inis

tration

N.A.; N.A. (2007)

N.A.; N.A. (2007)

N.A.; N.A. (2007)

N.A.; N.A. (2007)

N.A.; N.A. (2007)

N.A.; N.A. (2007)

N.A. (2007)

N.A. (2007)

N.A.; N.A. (2007)

N.A. (2007)

N.A.

N.A.

N.A.


166

Figure 4.11: Manufacturing sectors – Croatia (2010)

�ote: No data available for sectors C12 (tobacco products), C19 (coke and refined petroleum products) and C26 (manufacture of computer,

electronic and optical products)

Source: Eurostat

4.11.1 Introduction

In recent years, economic developments in Croatia

have been dominated by two issues: recession —

GDP growth averaged 4 %250 in 2000-08, but under

-2 % since, and EU accession, which has involved

increasing political support, technical assistance

and commitment to reform. These factors have had

an effect on all aspects of competitiveness. Also,

the country is characterised by a problematic degree

of regional disparity, with significant differences in

performance between Zagreb and peripheral

regions.

As part of the process of EU accession, a number of

long-term strategies have been developed that did

not exist previously. While the final shape of all of

these strategies is not yet clear and their effect will

depend on proper implementation and enforcement,

they present an opportunity to improve

competitiveness. One example is the industrial

strategy covering 12 priority industry sectors: food

and wood processing, automotive, pharmaceuticals,

medical equipment, ICT, textiles, defence, the

creative sector, chemicals, maritime technologies,

and civil engineering. This list immediately raises a

250 http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table

&init=1&plugin=1&language=en&pcode=tec00115.

number of issues — not only are there too many

sectors for a proper focus to develop, but the sectors

are largely low in value added and knowledge

intensity, indicating a lack of smart specialisation.

Currently, manufacturing accounts for 16.2 %

of GDP. While employment in industry in 2009 (at

25.8 %) was slightly higher than the EU average

(22.9 %), the value added (23.2 %) was below the

EU average (25 %).251 The main industries were

food, beverages and tobacco, chemicals,

pharmaceuticals, petroleum, minerals and rubber,

and metals. These reflect specialisation in low and

medium technology.

In 2012, labour productivity per person employed

was 80.2 % of the EU average.252 The gap has

narrowed narrowed considerably since 2007 —

including a significant setback after 2008.

251 Eurostat (2013) NACE Section C. 252 Eurostat

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Innovation

According to the 2013 Innovation Union

Scoreboard, Croatia is a below-average moderate

innovator, one of the ten worst performers when

compared with the EU-27 Member States.

However, a set of measures are being implemented

to strengthen research and innovation capacity.253

Expenditure on R&D is 0.75 % of GDP, business

expenditure on R&D 0.34 % (EU average 1 %) —

the 2020 target is 1.4 %. The country’s relative

strength is in human resources – it has had the

fastest improvement in the proportion of secondary

education attainment – but this has not translated

into improved performance. The research system

and intellectual assets are rated low, and industrial

value added is also low. High-tech manufacturing

accounts for 0.4 % of total employment and

knowledge-intensive services 2.3 %, as compared

with 1.1 % and 2.7 % respectively for the EU.254

There is a high degree of regional disparity, with

Zagreb clearly ahead of the rest of the country.

Since 2004, the Ministry of Economy, Labour and

Entrepreneurship, and since 2011 the Ministry of

Entrepreneurship and Crafts, have been operating a

system of grants for innovation, distributing EUR 7

million to 1 407 projects, 77 % of which has gone to

small and medium-sized enterprises (SMEs). In

recent years, R&D investment has decreased due to

the recession, spurring the government to launch a

number of reforms aimed at increasing innovation.

In the first half of 2013, the government plans to

complete the national innovation strategy, which

aims to strengthen cooperation between industry

and research institutions. The strategy includes a

plan for a network of competence centres in the 12

priority industries, of which three are already

operational. The aim is to promote advanced

technologies and market innovative solutions,

including in nanotechnology in wood processing.

Stakeholders agree that some of the priority

industries, in particular ICT and chemicals, have

253 Assessment of the 2013 economic programme for Croatia,

SWD(2013) 361. 254 http://epp.eurostat.ec.europa.eu/statistics_explained/

index.php?title=File:Statistics_on_employment_in_high_-_tech_sectors,_EU-27_and_selected_countries,_2010.PNG&filetimestamp=20120207155622.

growth potential. The strategy also seeks to

improve the quality of research through an

industrial PhDs fund, providing scholarships for

post-graduate doctoral studies, in coordination with

the private sector.

Skills

Tertiary education attainment is low, at 23.7 %

(well below the EU average of 35.8 %).255 There is

a brain drain issue; while Croatia performs well on

human capital, especially at secondary school level,

its economy suffers from low research quality and

lack of knowledge intensity. There are also

problems of skills mismatch and low participation

in lifelong learning. The recession has led to a

reduction in the already low provision of training.

As unemployment increases the supply of available

labour, employers have fewer incentives to train

their workforce.

In 2012, the government started to implement a

skills needs verification system, monitoring the

structure of the economy (by region and sector),

integrating results from three surveys (covering

employers, entrants to unemployment and

education) and forecasts. The system has identified

skills gaps and surpluses at regional level,

especially deficits in tourism-related service skills

in peripheral regions and technical skills for

industry.

Reforms are being implemented to improve the

links between the education system and the labour

market. The Croatian qualifications framework is

geared to increasing the quality and flexibility of

the education system. It will also link higher

education funding to output indicators.

Sustainability

Croatia scores relatively well on energy intensity

and the use of renewable energy sources. Energy

intensity is better than the EU average and

improving at a similar pace. Between 1995 and

2010, there was general improvement, including in

manufacturing.256 In particular, the renewable

energy sector has potential for further growth. In

2010, hydroelectric power accounted for 19.4 % of

255 Eurostat (2013) t2020_41. 256 Odyssee Mure (2012), Energy Efficiency Policies and

Measures in Croatia.

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168

primary energy supply and biomass a further 3.9 %,

while other renewables contributed 0.5 %.257 The

target for electricity generation from renewable

sources is 20 % by 2020.258

Investments in the transmission and distribution

network will be necessary to accommodate an

increasing uptake of intermittent electricity in the

system. The liquidified natural gas terminal and its

connecting pipelines are a very important element

of the North-South gas corridor and as such a

security of supply asset for the region.

The Croatian Cleaner Production Centre was

established in 2000 to promote efficient and

environment-friendly solutions for industry,

services and the state administration. Its activities

include training 204 environmental management

system experts and implementing 146 cleaner

production projects.

A number of legislative projects are currently being

planned that may influence the sustainability of

Croatian industry. The Sustainable Waste

Management Act is due to be adopted in 2013.

Electricity grid operators will propose plans for the

development of smart grids in 2013. A climate

change adaptation strategy, aimed at controlling

greenhouse gas emissions, is planned for 2014.

The plan is for the industrial strategy to include

incentives for sustainable production and the

development of a green economy; measures include

the introduction of sustainability criteria in public

procurement and the creation of an environmental

protection logo.


In 2011, exports accounted for 42 % of GDP.259

Between 2000 and 2008, Croatian exports more

than doubled in nominal terms and grew 15% from

2011 to 2012.260 The main exports are transport

257 Hrvoje Pozar Energy Institute (2010) Country Energy

Profile — Croatia, http://www.eihp.hr/hrvatski/projekti/unece/pdf/bibilioteka/Energy%20profile%20-%202010.pdf.

258 Eurostat http://epp.eurostat.ec.europa.eu/portal/page/portal/europe_2020_indicators/headline_indicators

259 World Bank Indicator for 2011. 260 http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&

init=1&plugin=1&language=en&pcode=tec00110.

equipment, machinery, textiles, chemicals,

foodstuffs and fuels. As Croatia’s main trading

partner, the EU is the destination for 63 % of its

exports.261 The trade balance has been in deficit, but

has improved slightly since 2008 due to falling

domestic demand.262

The Croatian Chamber of Economy and Chamber

of Trades and Crafts represent Croatian exporters’

interests abroad. The Entrepreneurial Impulse

initiative in 2012 was aimed at raising the

international profile of Croatian businesses through

international fairs and in new markets. 83 projects

received EUR 2.3 million in support. A new export

strategy is also being developed, the previous one

having run its course.

With Croatia’s accession to the EU, trade is likely

increase, even though most barriers have already

been removed. Exports of services are significant

— mainly as regards tourism but also software

development and business process outplacement.


administration


Croatia’s business environment is one of the major

problem areas for competitiveness, but also a major

area of reform. The World Bank’s Doing Business

2013 report ranks Croatia 84th globally, behind all

EU countries except Malta. Although the position

has improved significantly since 2005, making the

country the 14th fastest reformer in the world

(faster than any EU country), its position worsened

as compared with the previous ranking. Two

aspects of the business environment are especially

problematic: access to finance, and inefficient

public administration plagued by corruption. The

former is largely due to the effects of the recession

on growth, export performance and the investment

climate. The latter can be traced back to the

prolonged transition to a market economy,

combined with ageing infrastructure systems,

decentralised public administration with many

decision-making competences at local level, and the

existence of monopolistic state-owned enterprises.

261 Eurostat 2009. 262 Eurostat

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tec00043.

http://www.eihp.hr/hrvatski/projekti/unece/pdf/bibilioteka/Energy%20profile%20-%202010.pdf

http://www.eihp.hr/hrvatski/projekti/unece/pdf/bibilioteka/Energy%20profile%20-%202010.pdf

http://epp.eurostat.ec.europa.eu/portal/page/portal/europe_2020_indicators/headline_indicators

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169

The World Bank has emphasised the need for

reform in dealing with construction permits,

registering property, protecting investors, and

trading across borders.

In 2012-13, the government has implemented a

number of reforms aimed at improving the business

environment. The procedures for registering a

company have been simplified. Registration times

and costs have been reduced, in particular by

introducing a two-day online procedure for crafts,

and a five-day procedure for limited liability

companies. The public-private dialogue, a forum

for consultation on aspects of legislation affecting

SMEs, has been set up. Also, an SME observatory

has been established to collect and provide

information.

Furthermore, because of issues raised as part of the

EU accession process, the role of the state in the

economy is being reduced. The privatisation

contract for the Brodosplit shipyard was signed in

February 2013 and it is expected that the

privatisation process for the Brodotrogir shipyard

will be completed in time for Croatia’s accession.263

Further privatisation, albeit slow, is planned.

Adopted in September 2012, the Act on Investment

Promotion and Development of the Investment

Climate established a working group to monitor the

implementation of investment projects and identify

and remove administrative obstacles. Businesses

can also submit direct requests to the working

group to investigate specific barriers.

Significant investment (backed by EU funds) is

planned for developing railway infrastructure, sea

ports and inland waterways, as improvements are

needed, in particular in peripheral regions. The

programme for the development of broadband

access infrastructure is also being developed, which

is necessary as Croatia is below the EU average in

all areas on the Digital Agenda Scoreboard.264

There are plans to adopt in 2013 the Strategy for

Entrepreneurship 2020, aimed at further improving

the business environment and promoting SMEs’ use

of R&D and innovation. Plans to reform the public

procurement system include introducing non-price 263 http://europa.eu/rapid/press-release_IP-13-252_en.htm. 264 Digital Agenda Scoreboard http://digital-agenda-

data.eu/index.php?scenario=4&year=2011&countries[]=HR.

criteria and reducing the size of tender lots in order

to attract more SMEs.


Dealing with the public administration remains a

major burden for businesses, especially because of

corruption. A 2013 report by Ernst and Young

ranks Croatia as the second most corrupt of the EU-

28 countries, with 90 % of respondents saying

corruption is widespread in business.265

Transparency International ranks Croatia 62nd, the

5th most corrupt of the EU-28 countries.266 It seems

that corruption has been reduced in recent years at

central level, but remains a problem at the regional

and local levels.

Although the compliance burden of the tax system

is a relative strong point,267 significant work

remains to be done to ensure uniform and

competent application of the tax code throughout

the country, for which the tax administration needs

more and better training. The VAT rate has been

increased from 23 % to 25 %, while healthcare

contributions lowered from 15 % to 13 %.

Reforms were implemented in 2012-13 to make the

tax system more business-friendly, and the Office

for Large Taxpayers was established to provide

targeted services and improve tax governance.

Amendments to the General Tax Act have

established a standard tax declaration form and

made it possible to submit forms online.

In February 2012, a Freedom of Information Act

was adopted, aiming to make public administration

more transparent and efficient, and creating the post

of Information Commissioner.

A reform of the judiciary has included a mediation

and conciliation process to facilitate insolvency and

contract enforcement procedures. Further changes

to the civil code and bankruptcy legislation have

also promoted alternative dispute resolution. A new

Enforcement Agency has been established. Despite

this, a large backlog of unresolved cases remains,

although case resolution has improved – the

clearance rate for enforcement cases was 93.7 % in

265 Ernst and Young (2013) Europe, Middle East, India and

Africa Fraud Survey 2013. 266 Transparency International (2012) Corruption Perceptions

Index cpi.transparency.org/cpi2012/results/. 267 Croatia ranks 42nd on the PWC Paying Taxes report.

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170

2010. However, the length of proceedings is very

high compared to the majority of Member States.

Shortcomings in the functioning of the justice

system undermine the confidence of citizens and

businesses in the public institutions and weigh on

Croatia’s business environment.


Access to finance is a major problem area for

competitiveness. The investment climate has

worsened considerably since 2008 and there has

been a marked fall in the accessibility of

commercial bank loans. Interest rates have

increased, with SMEs facing rates of over 8 %,268

and banks are demanding higher collateral.

Alternative funding sources, such as venture

capital, remain essentially unavailable — in 2008-

11, fewer than 1 % of SMEs used equity finance.269

A report by the Croatian SME Policy Centre

described in detail the available funding options

(banks, microfinance, venture capital funds,

business angels, government incentive programmes

and subsidised credit lines), concluding that the

dominance of traditional banking products is a

systemic problem.270 The report also criticised

government financing programmes for insufficient

coordination and lack of evaluation. Again, access-

to-finance conditions are significantly worse in

peripheral regions.

Two state agencies provide financing for

enterprises: the Croatian Bank for Reconstruction

and Development (HBOR) and HAMAG Invest.

HAMAG provides microloans and loan guarantees,

and issues letters of intent for SMEs with a good

business plan but no credit history. The HBOR

provides loans on favourable terms – 1 352 in 2012,

27 % more than in 2011. Its 2013 budget for SME

loans is EUR 603 million. Currently, only two

Croatian financial institutions channel EU funds

from the Competitiveness and Innovation

Framework Programme to SMEs.

Under a new programme being introduced in 2013

on the basis of a venture capital investment fund

with a budget of EUR 46 million, 25 % to 50 %

268 Croatian Ministry of Entrepreneurship and Crafts. 269 DG ENTR, EC (2011), SME’s Access to Finance Survey

2011. 270 CEPOR (2011), SME Report for Croatia 2011.

stakes will be purchased in projects in the 12

priority industrial sectors. The HBOR is also

exploring the possibility of establishing a venture

capital fund of EUR 134-201 million for export

businesses.

The Act on Investment Promotion and

Development of Investment Climate provides

incentives for job creation and training, especially

in areas of high unemployment, and eases access to

incentive measures for micro-entrepreneurs and

foreign investors. It concentrates on innovative

sectors, manufacturing and high value-added

services, including tourism.

Historically, foreign direct investment has played

an important role. From 1993 to 2012, this

amounted to EUR 26.1 billion, concentrated in the

financial sector and the wholesale and retail

trade.271 However, since 2008, FDI inflows have

decreased by over 75 %.272 In May 2012, the

government responded by establishing an agency

for investments and competitiveness. Active

promotion programmes aimed at improving the

image of Croatia as a safe place for investment

include the targeted investors campaign, which

presents comprehensive business plans to potential

investors. Croatia operates a network of 13 free

economic zones.

4.11.6 Conclusions

Croatia has recently implemented a considerable

number of reforms. In the framework of EU

accession, it has completed all the reforms called

for in its progress reports, including those

concerning the judiciary and privatisation. Many

weaknesses have been acknowledged by the

authorities and are partly reflected in the already

adopted measures, and in reform intentions.

However, large obstacles remain as regards access

to finance, corruption (especially in business), the

efficiency of public administration, and the

innovation infrastructure. The action plans currently

being drafted therefore need to be of high quality

and properly implemented. Full implementation of

reform plans already adopted is a precondition for

better competitiveness.

271 Croatian Ministry of Entrepreneurship and Crafts. 272 World Bank Indicator for 2003-12.


171

While Europe’s economy continues to suffer,

Croatia is likely to experience limited access to

finance, depressed demand for exports, lagging

competitiveness and lower foreign direct

investment. In the medium term, the benefits of

joining the single market and the impact of EU

funds could contribute considerably to the growth

of the Croatian economy.

Country chapter: Italy

172

4.12. Italy

-3 -2 -1 0 1 2 3





























Italy

2007

latest available


Innovative industr

ial policy

Susta

inable

industr

yB

usin

ess E

nvir

onm

ent and E

ntr

epre

neurs

hip

Fin

ance a

nd

Investm

ent


Export

perf

orm

ance

Public

adm

inis

tration

N.A.

3.6


173

Figure 4.12: Manufacturing sectors – Italy (2010)

Source: Eurostat

4.12.1 Introduction

Manufacturing accounts for 15.5 % of total value

added in the economy, which is slightly above the

EU average (15.3 %). It is relatively concentrated in

low and medium-low technology sectors, including

clothing, leather, textiles, wood and metals, while

the share of more innovative high and medium-high

tech sectors is smaller than in other EU economies.

Beyond sectoral specialisation, the uneven

performance of Italian industry has its roots in the

fragmentation of the industrial structure, as Italy

has the largest number of enterprises in the EU,

with more than four million SMEs, twice as many

as in Germany.

In terms of average unit labour costs, Italy’s

competitiveness has eroded considerably over the

last ten years, due to an increase in nominal gross

wages combined with sluggish productivity growth.

However, real wages have remained almost stable,

highlighting the importance of addressing the

productivity gap while better aligning wages on

productivity. Alleviating the tax wedge on labour

would also help.

Italy is experiencing a real deindustrialisation, as

the industrial production index has lost 20

percentage points since 2007. This development

seems to be attributable both to subdued activity

due to the downturn, and to the closure of many

plants in some industrial basics (petrochemicals,

steel, and biofuels). In order to deal with as many as

150 plant closures, the government has overhauled

the relevant legislation to help plant conversion and

regeneration of industrial sites.


Innovation

In 2011, Italy invested a total of 1.3 % of its GDP in

research and development. This keeps the country

close to its national target of 1.5 % by 2020, but

well below the current EU average (2.0 %) and far

behind the R&D intensity of countries at the

technology frontier. Although the share of public

R&D is largely in line with the country’s main

competitors, the contribution of the private sector to

R&D intensity is particularly low (0.7 % of GDP).

The Innovation Union Scoreboard273 points to

major weaknesses in the Italian system, in

particular the limited availability of finance for

corporate research and innovation, and the

insufficient commercialisation of the results. Thus,

the innovation policy would benefit most from

focusing on instruments that could enhance

273 http://ec.europa.eu/enterprise/policies/innovation/files/ius-

2013_en.pdf.




174

technological specialisation, and that would be

oriented towards the commercialisation of

innovation.

This is the logic behind the bottom-up approach of

the ‘smart cities and communities’ platform, to

which EUR 890 million have been allocated. The

Ministry of Research has identified it as a driver of

R&D investments in the priority areas for the

improvement of urban services: security, ageing,

welfare technologies, waste management, health,

transport, last mile logistics, smart grids,

sustainable architecture, cultural heritage and cloud

computing technologies for smart government.

Another strand in innovation policy is the

development of national technology clusters,

identified as catalysts for growth and structural

change. Nine priority themes have been identified:

green chemistry, agrifood, ambient intelligence and

ambient assisted living, life sciences, smart

communities technologies, advanced mobility

systems, aerospace, innovative energy systems, and

intelligent manufacturing.

Italy lags behind in the adoption of information and

communication technologies, and the government’s

growth initiative274 has created a new digital agency

with the task of promoting demand-led innovation,

including through innovative and pre-commercial

procurement.

One explanation of the limited investment of the

private sector in R&D is the preponderance of small

firms, as the average size of Italian firms is much

smaller than that of other leading European

economies. Thus, an important objective would

seem to be to encourage firm growth, while at the

same time encouraging cooperation in order to

increase the capacity to bear the risks associated

with R&D activity. The government has addressed

this weakness by simplifying the procedures for

concluding network contracts,275 identified as a tool

to promote research and innovation. The

government has also adopted tax incentives for

hiring researchers, but these have not yet been

implemented. The European structural funds will

also contribute to investment in research and

innovation in 2014-2020.276

274 The decree is called ‘Crescita 2.0’. 275 ‘Contratti di rete’. 276 European Structural and Innovation Funds for 2014-2020.

As the venture capital market remains weak, other

measures are needed to enhance the equity capital

of many firms as the debt/equity ratio is higher than

the EU average, which hampers access to finance

and investment, in particular in intangibles (see the

section on finance and investment below).277

Finally, the government has devised a new legal

framework to support innovative start-ups.278 The

scheme can provide welcome funding for many

firms that have been denied credit due to the risk

aversion of the Italian banking system. It should be

noted that the framework contains an ambitious

scheme on crowdfunding that is one of the first

equity crowdfunding frameworks in the world.

Skills

There are observed shortages of skilled labour in

the manufacturing sector. In recent years a series of

reforms have aimed to strengthen the provision of

technical and vocational training to better respond

to labour demand. Of particular importance are the

certification of skills, and the introduction of post-

secondary technical institutes279 to provide two-year

tertiary qualifications focused on key sectors of the

economy. Although they still involve only a limited

number of students, the 62 institutes have the

potential to further develop the vocational higher

education system. In the same vein, the government

has reformed the apprenticeship system, but at least

for the time being, its use remains marginal.

Discussions are ongoing about possibilities to

improve the attractiveness of the system.

Sustainability

According to estimates,280 almost one in four

enterprises (23.6 %) have invested in green products

and technologies in the last three years. In the

context of overall diminishing fixed investment,

these figures show that there is business confidence

in the potential of the green economy. Further, over

37 % of firms that invested in green technologies

277 Also in the Council recommendation on Italy's 2013

national reform programme and delivering a Council opinion on Italy's stability programme for 2012-17: “Promote further the development of capital markets to diversify and enhance firms' access to finance, especially into equity, and in turn foster their innovation capacity and growth.”

278 The decree is called ‘Sviluppo 2.0’. 279 Istituti Tecnici Superiori. 280 http://www.symbola.net/assets/files/Rapporto_Green

Italy_2012_1358333078.pdf.

http://www.symbola.net/assets/files/Rapporto_Green%20Italy_2012_1358333078.pdf

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175

were active on international markets (against about

22 % of firms that didn’t). Such firms tend also to

be innovative, as about 38 % of firms that invest in

the green economy introduced product or service

innovations (against slightly more than 18 % of

firms that didn’t). Even when taking into account

employment changes in the difficult period in

question, these firms proved more resilient than

others, as their workforce decreased by 0.7 %

against 1.4 %.

As far as policy measures are concerned, the

government has adopted tax incentives for hiring

young workers in the green economy. The network

contracts referred to above are also helping firms to

go green, as out of 458 contracts, 87 are related to

sustainability.


Italy’s share of world trade trended down between

2002 and 2011 (from 3.9 % to 2.9 %). However,

exports increased by 5 % in 2012, helping the trade

balance to reach its best level since 1999 – although

improvements in trade balance are also driven by a

decline in imports owing to weak domestic demand.

Italy's exports are now back to pre-crisis levels in

value terms, but they remain below in volume

terms. The export performance is hampered by two

constraints. Geographically, exports go to countries

whose economic growth has tended to be below

average. Italy is also specialised in low-tech

sectors, where the competition from countries with

a lower cost base is stronger. Clearly, it would be

beneficial to move along the international value

chains to activities with higher technological and

knowledge intensity.

In 2012, the government made a considerable

effort, welcomed by the business community, to

improve the governance of its internationalisation

policy. Primarily it reactivated and rationalised the

operations of the Istituto Commercio Estero, a

government agency for the promotion and

internationalisation of firms. In addition to

providing business intelligence, consulting services

and investment promotion to Italian firms, one of

its main tasks is to implement the �ational plan for

exports 2013-15.281 The aim is to increase the value

281 This plan was established by the ‘Cabina di regia per

l’Italia internazionale’, a policy body composed of four

of exports in three years to EUR 620 billion (35-

38 % of GDP), from EUR 473 billion in 2012, by

improving the coordination of internationalisation

policies.

The government has also sought to attract more

foreign direct investment. To this end it has

established Desk Italia, which is a one-stop access

point for foreign investors on all administrative

matters relating to investment projects. In addition,

the recourse to the judicial system has been

streamlined, as cases involving foreign investors

will be dealt with by only three courts (Milan,

Rome and Naples), to allow for higher certainty in

the decisions.

4.12.4 Business Environment and public

administration


Overall, Italy ranks 73rd in the World Bank Doing

Business, drawn down in particular by construction

permits, getting electricity, getting credit, and

enforcing contracts. There seem to be too many

obstacles to firm growth, as few firms become

international players. Although there are policy

initiatives to improve its business environment and

facilitate the life of SMEs, their implementation is

lagging and the administrative burden on businesses

remains high. Entrepreneurship issues continue to

be problematic, as the relative ranking of Italy

worsened in the ease of starting a business,282 and

schools are not able to create an entrepreneurial

mindset.283 Competitiveness may improve if the

domestic electricity grid is upgraded to remove

existing bottlenecks and new gas storage and

import facilities are improved.

Italy has introduced market-opening reforms in

many of its product and service market regulations.

However, challenges remain in local public

services, transport and the energy sector, and there

are signs that the reform process is slowing down.

High electricity and gas prices reflect limited

competition and infrastructure bottlenecks. In many

cases the necessary decrees to implement the

ministers, the Conferenza delle Regioni and social partners (Unioncamere, Confindustria, ABI and Rete Imprese).

282 World Bank Doing Business 2013. 283 SBA factsheet Italy 2012.


176

general liberalisation measures have not been

adopted yet. In some cases the liberalisation

initiatives have been diluted, and the recent reform

of the legal profession seems to backtrack on the

previous reform of professions. The implementation

of the proposal aimed at eliminating all regulations

across the board — except where strictly necessary

— is not progressing.


Despite the efforts made in recent years, the

performance of public administration as measured

by the World Bank’s Government Effectiveness

Indicator is well below the EU average. The main

shortcomings include the long proceedings in civil

justice, and a burdensome administrative and

regulatory framework. The often unclear division of

responsibilities between the state and the regions

that ensued from the 2001 constitutional reform

reduces the effectiveness of simplification measures

introduced at the central level.

The regions' exclusive right to regulate economic

activities, combined with inadequate inter-regional

coordination, has increased differences between

regions' administrative requirements. In the same

way, the inefficient power-sharing between the

state and regions, for example regarding energy, is

hampering the development of essential

infrastructure. Overall, the administrative

complexities place a heavy burden on enterprises.

The annual costs of complying with administrative

procedures have been estimated at EUR 26.5

billion.

The government has stepped up efforts to reform

the judiciary in order to streamline judicial

procedures.284 A geographical reorganisation of

courts should be completed by September 2013. For

civil cases the right to appeal has been limited to

controversial cases. Commercial courts have been

introduced for cases concerning intellectual

property, limited companies and public

procurement. However, they will not have

jurisdiction in commercial disputes. The

government has adopted a decree-law on the

compulsory use of mediation in some private law

subjects. Further, a range of measures regarding

284 For indicators on Justice see EU Justice Scoreboard 2013

available at http://ec.europa.eu/justice/effective-justice/files/justice_scoreboard_communication_en.pdf.

civil justice have been adopted. Additional staff

will help to reduce the case backlog in the Courts of

Appeal, and in the courts of first instance; case-

handling in the Court of Cassation is being

strengthened; and compulsory mediation is being

reintroduced with slight adjustments.285


Bank lending to non-financial firms has continued

to contract and was in June 2013 down 4.8 % year-

on-year.286 This reflects weak demand, higher firm

risk and tightening credit standards. The average

cost of credit, albeit decreasing, remains 90 basis

points higher than the euro-area average. However,

survey results287 point to some easing of the overall

financing conditions for SMEs.

The government has sought to mitigate credit risk

by strengthening the guarantee fund for SMEs.

With its new operational provisions, in many cases

the guarantee can cover 80 % of funding and the

amounts guaranteed can be up to EUR 2.5 million.

Other initiatives have been taken to strengthen the

balance sheets of firms. The government has

introduced rules to make it easier for SMEs to raise

debt, in particular through issuing short-term

commercial paper and long-term bonds and similar

instruments. The introduction of an allowance for

corporate equity allows companies to deduct part of

the notional cost of newly injected equity from

taxable income.

The introduction of the fund for sustainable growth

has been a step away from subsidies. It replaces 43

different support schemes, with an allocation of

about EUR 600 million in 2012 and EUR 200

million in subsequent years. The fund is organised

along three priorities: research and innovation;

strengthening the industrial structure; and

internationalisation.

In April 2013, the government acted on one of the

major problems for businesses, the payment of an

285 The compulsory mediation had been repealed by the

Constitutional Court last October; it has been adjusted regarding the areas concerned, the maximum duration of mediation and the fees due in case of failure to reach an agreement. Decree-law 69 of 21 June 2013, “Decreto del Fare”.

286 Bank of Italy, Money and banking statistics. 287 European Central Bank Monthly Bulletin, August 2013.

http://ec.europa.eu/justice/effective-justice/files/justice_scoreboard_communication_en.pdf

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177

estimated EUR 90 billion in commercial debt

arrears owed by the public authorities to businesses.

An immediately effective provision clears the

payment of EUR 40 billion of arrears over the next

two years. If correctly implemented, the measure

will have a positive impact on the survival rate of

businesses, as according to estimates a third of

bankruptcies are due to late payments. Effective

implementation of the late payment directive,

entered into force in January 2013, could also make

firms’ management and planning easier and their

operations more efficient.

4.12.6 Conclusions

Many of the problems that drag down

competitiveness in Italy like low private investment

in R&D, lack of innovative start-ups, problems in

the supply of skills, lack of equity financing,

meagre growth of firms, and internationalisation

can be at least partially traced back to the

administrative and regulatory constraints of the

business environment. In particular, paying taxes

and enforcing contracts are particularly difficult.

Continuing coherent structural reforms of the public

sector are needed for a modern and efficient

administration to evolve.

The government has continued to pursue reforms

improving the business environment and making it

more conducive to growth. The reform of the

judiciary system in 2013 has introduced some novel

provisions (e.g. reduction of judiciary offices,

appointment of new auxiliary staff helping judges),

the outcome of which in terms of efficiency of

justice still needs to be proven. The anti-corruption

legislation that was finalised in 2012 is also a

promising step.

Encouraging entrepreneurship has been addressed

by allowing the possibility of setting up a business

with a capital of one euro and by increasing support

for innovative start-ups. The system of subsidies to

enterprises has been reformed, even if more radical

proposals were dropped, including a plan to restrict

the use of subsidies to clear cases of market failure,

and to use the savings to reduce the tax wedge on

labour.288 The tax allowance for new corporate

equity has potential to enhance growth when the

288 The Giavazzi Report.

recovery starts. However, these effects are likely to

be visible only in the longer run, as operating

profits will still be low early on in the upturn.

An important message for policy focus can be

found in the performance of firms that have adopted

a strategy of innovation and internationalisation.

These firms have fared far better in the crisis and it

appears that the choice to compete internationally is

a key factor leading to innovation. While research

shows that this choice ultimately rests on the

productivity of the firm, the reform of the

governance of the internationalisation system can

help reduce the productivity threshold at which a

firm may enter the international markets and

therefore increase the number of exporting firms.

From this point of view, the reform of the

governance of the internationalisation system can

prove a pivotal step for Italian competitiveness.

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